European Movement in Serbia

PREPARING YUGOSLAVIAFOR EUROPEAN INTEGRATION

Editors:

Dr Jelica MiniæDr Duško Lopandiæ

Belgrade, November 2000.

Authors:Dr Srboljub Antiæ, Prof. Dr Stojan Babiæ, Dr Budimir Baboviæ, Prof. DrVojislav Bajiæ, Prof. Dr Vladimir Goati, Dr Miroslav Had`iæ, Prof. DrIvan Iviæ, Prof. Dr Miroljub Labus, Dr Duško Lopandiæ, Zoran LutovacM.A., Dr Gordana Matkoviæ, Dr Jelica Miniæ, Dr Vatroslav Vekariæ,Slobodan Vuèetiæ

Editors:Dr Jelica Miniæ, Dr Duško Lopandiæ

Publisher:

European Movement in SerbiaBelgrade, Ðure Jakšiæa 5/ITel/fax: (381) 11 630 281E-mail: emins@eunet.yuWeb: http://www.emins.org

For the publisher:

Jelica Miniæ

Translation & language editing:

Linda Louise Krstajiæ

Art & Layout:

Borivoje Ušæumliæ

Prepress:

Dragan Joksimoviæ, Nina Lopandiæ

Cover illustration:

Predrag Koraksiæ - Corax

Printed in:

2000 copies

Printed by:

“Prometej”, Belgrade

TABLE OF CONTENTS

Introduction .................................................................................5

1. Macroeconomic adjustments ...............................................11

2. Trade policy .........................................................................24

3. Monetary regimes and euroization ......................................35

4. Reconstruction and investments ..........................................44

5. The social sector and disadvantaged groups........................52

6. Legal and institutional adjustments

to European Union standards...............................................63

7. Democratization, the civil society and education ................80

8. Internal security and protection of minority rights ..............93

9. Military security.................................................................107

10. Priority tasks of foreign policy ..........................................118

11. Executive summary: Steps towards Europe.......................131

INTRODUCTION

“The course of events must be changed. To that end, the spirit

of men must be changed. Words are not enough ...What is

needed is deep, true, urgent action that changes things and

brings about a renewal of hope, in which nations have virtu-

ally ceased to believe.”

(Jean Monnet, on the occasion of the creation of the Euro-

pean Coal and Steel Community, 1949)

Years of devastating and irresponsible politics have brought Ser-bia and FRY to the very bottom of the list of potential candidates formembership in the European Union. Only ten years ago, however, Ser-bia, as part of the SFRY, was the European Community’s most privi-leged partner amongst East European and Mediterranean countries – ithad an institutional framework in place for cooperation and highly de-veloped economic relations. Today, after ten year’s of drifting furtherand further away, the changes brought about by the elections on 24 Sep-tember 2000 have made it possible for the political and social barriers inthe way of cooperation between FRY and the EU to be overcome rela-tively quickly, bearing in mind that good will evidently exists on bothsides.

Despite the country’s very difficult situation at present, FRY has

certain objective advantages concerning future membership in the EU:

historical tradition and memory of the period before 1991, when rela-

tions with the EU were good; geo-strategic advantages, given the fact

that it is a central and relatively large Balkan country; a traditionally

market-oriented economy and managerial structures, despite ten years

of bad macro-economic management and international economic sanc-

tions; parts of a social structure (a considerable part of the managerial

5

structure, a formed working class, academic and other human resources,

acquaintance with the EU system, etc.), which are on the same level as

or better than in neighbouring countries. Besides, in some years, after

the new round of EU expansion, FRY will border on it, which will be ad-

ditional motivation for both sides to promote cooperation and improve

prospects for future membership.

It is in Yugoslavia’s strategic interest to become integrated in theEU. It is, on the one hand, a way of ensuring easier access to the mostimportant market in the world and, on the other hand, an essential pre-condition for resolving the development problems of the domestic econ-omy and the problems involved in the achievement of a stable demo-cratic society. It is also the only way for all countries of South EasternEurope, under the auspices of the EU, to liberalize international tradeand capital trends completely, reconstruct their infrastructures and, byadopting the European legal and institutional framework, to promotetheir own competitiveness in the European and world economy. The Eu-ropean option will enable Yugoslavia to strengthen existing links andnormalize and renew broken links with the former Yugoslav republics,which, prior to the break-up of the country, accounted for two thirds ofextra-republican trade. The liberalization of cooperation with neigh-bouring countries of Eastern and Central Europe and with Mediterra-nean countries is the natural springboard for preparations for the highlycompetitive West European and world markets.

The European Movement in Serbia, non-governmental organiza-

tion, decided back in November 1999 to elaborate a document to en-

courage political leaders and the domestic professional and broader

public to prepare for negotiations and association with the European

Union. The political circumstances at the time did not indicate the possi-

bility of more rapid and essential change in the country’s political orien-

tation, which is the precondition for talks to be set underway. The

citizens of Serbia, however, despite anti-European propaganda and

negative, recent experience with European countries, were aware of the

6

country’s long-term interests1 and prepared to make a rational decision.

This they did at the elections a year later.

The book entitled Preparing Yugoslavia for European Integra-

tion was mainly completed prior to the elections in September 2000. It

represents only the first step in a broad and long-term project to be real-

ized over the coming years. A number of documents and publications of

a strategic nature relating to the future of South Eastern Europe and its

relations with the European Union were taken into account when estab-

lishing chapter structure. These included the Ljubljana Declaration of

the Forum of Independent Expert Groups and Institutes from South

Eastern Europe2, the guidelines of the Brussels Centre for European Pol-

icy Studies (CEPS) given in a study entitled A System for Post-War

South-Eastern Europe3, as well as the European Commission document

on the Stabilization and Association Process for the Countries of South

Eastern Europe4. These documents5, as well as the Stability Pact for

South Eastern Europe6, which was greeted with exceptional publicity,

showed that major work was underway in the European Union on the

7

1 An important impetus for this book was given by a public opinion poll in September1999, three months after the end of the war in Kosovo and NATO’s military interven-tion. That poll showed that 48% of the citizens questioned wanted the country to be-come a full member of the European Union, 29% in the main approved suchorientation and only 6% rejected it. See: Javno mnjenje Srbije (Public Opinion inSerbia), edited by Sreæko Mihajloviæ, Centar za prouèavanje alternativa, Belgrade,1999, p. 33.

2 Declaration of the “Europa South-East” - Policy Forum on the Stability Pact,

Ljubljana, 18-20 June 1999.

3 A System for Post-War South-East Europe, WD, No. 131, CEPS, Brussels, May

1999, http://www.ceps.be

4 Commission Communication to the Council and European Parliament on the Stabili-

sation and Association Process for the Countries of South Eastern Europe, COM

(99) 235, Brussels, 26.05.1999.

5 Also used as reference was the publication entitled A New Croatia, Fast-Forward

into Europe, edited by Ljubomir �u�i�, European Civic Initiative for Democratic Al-

ternative, Croatia, and Centre for European Policy Studies, Zagreb and Brussels,

1999.

6 Stability Pact for South Eastern Europe, Cologne, 10 June 1999.

formulation of a coherent common strategy towards the region and that,

in that context, the accelerated inclusion of FRY in the European and re-

gional integration processes will be crucial for the success of the men-

tioned initiatives. A step forward has been made thanks to the latest

Council of Europe document on introducing exceptional trade mea-

sures for countries and territories participating in or linked to the EU’s

Stabilization and Association Process7, as well as the study entitled A

Comprehensive Trade Policy Plan for the Western Balkans8 by the Eu-

ropean Institute in Sofia and CEPS in Brussels. In other words, it could

be noted that growing political good will existed on both sides to over-

come the barriers to cooperation to date. To this should be added the

very active role of FRY’s neighbors that have helped many factors on

the social and political scene (independent media, non-governmental or-

ganizations, free towns and municipalities, opposition parties, etc.)

make a significant step away from many years of isolation.

Experts from a large number of independent expert groups, insti-

tutes and non-governmental organizations9 have participated in the

elaboration of this study. It is, therefore, the result of in-depth analyses

performed simultaneously in several places and in several domains.

This is, in this sense, a summarizing document representing only part of

the research efforts that have, unfortunately, up until now been uncoor-

dinated and insufficiently utilized. It has been our wish to send a mes-

sage to the domestic professional and broader public, as well as to future

8

7 Council Regulation (EC) No. 2007/2000 introducing exceptional trade measures for

countries and territories participating in or linked to the EU’s Stabilisation and Asso-

ciation Process, Brussels, 18 September 2000.

8 Stanislav Daskalov and Nikolay E. Mladenov et al, A Comprehensive Trade Policy

Plan for the Western Balkans: A Bold Initiative to Bring More Stability and Prosper-

ity to South Eastern Europe, WD 146, European Institute, Sofia, and Centre for Euro-

pean Policy Studies, Brussels, June 2000.

9 European Movement in Serbia, G17, League of Experts (LEX), Center for Free Elec-tions and Democracy (CeSID), Center for Civil-Military Relations, Center for Politi-cal Studies Research and Public Opinion, Alternative Academic EducationalNetwork (AAOM), Center for Strategic Studies, Economic Institute and Institute ofEconomic Sciences.

partners in the European Union. This message states that the necessary

prior knowledge and human capital exist to set underway preparations

for future negotiations, despite the many years of isolation and the total

absence of support from the former ruling regime or its interest in using

that knowledge or taking account of the message. There are groups and

individuals in many scientific institutions, the administration and enter-

prises that have kept constantly abreast with developments in the EU,

despite the collapse of the economy and of the society in which they

live. Our book is a call to all of them and to the young people who have

not had the opportunity to gain the necessary knowledge or to channel

their professional capacities towards comprehensive linkage with Euro-

pean and regional partners, that is towards the popularization of the Eu-

ropean idea and the acceleration of the integration of FRY in Europe.

The previous authorities in the country (with the exception ofMontenegro in recent years) did nothing in the direction of providing in-formation on the possibilities of gradually integrating the country in theEU, nor did they prepare or adapt the country for this eventuality. Theefforts on the part of representatives of the civil society to compensatefor this shortcoming have proven to be effective, as they have createdthe basic preconditions for a change in this state of affairs. Independentscientific, expert and business analyses carried out in the individual do-mains, parallel to similar analyses carried out by EU associate countriesfrom Central and Eastern Europe, will certainly represent a solid startingpoint for the new administration, as well as for the EU itself, in shapingpolitical decisions linked to the process of FRY’s accelerated integra-tion.

This book is, therefore, also intended for the new federal and re-publican administrations. Communications with representatives of Eu-ropean countries and the EU are becoming increasingly intensive by theday; emergency assistance programmes are being defined; meetings ofexperts and businessmen are being organized. If this study serves as ahandbook for current talks, it will have fulfilled its purpose.

We are aware that FRY will not be able to become a full memberof the EU for many years. Preparations for entry into the EU are a long

9

and frequently painful process, as many less developed European coun-tries have already discovered. But the price of inclusion in European in-tegration processes must be paid. On the long-term, this is the only wayfor the FRY to achieve political stability and economic development.

Editors

10

1. MACROECONOMIC ADJUSTMENTS

1.1. Introduction

FRY’s starting position is very bad. Virtually all quantitative eco-nomic indicators are the lowest in the entire region, and mistrust in thestate and the absence of independent market institutions represent par-ticular problems. The drastic deterioration of all economic indicators inSerbia in the course of the 1990’s was preceded by stagnation in the1980’s, and we can therefore say that the economic crisis in Serbia haslasted since 1979. Given the duration and the extent of the fall in the so-cial product, this is one of the longest and most deep-seated crises in theeconomic history of Europe since the emergence of industry.

The plummeting economic fall in the 1990’s was caused by nu-

merous external and internal factors. The break-up of the former coun-

try, accompanied by wars, UN sanctions, hyperinflation, NATO’s air

strikes, ban on investments, alongside the government’s bad economic

policy, resulted in estimates of the GDP at the end of the 1990’s ranging

between $1,300 and $1,70010 per capita. The fall of some 50% in the

GDP in the course of one decade probably best shows the depth of the

economic crisis, but other economic parameters are catastrophic too.

Industrial production, for example, in 2000 is as much as 74%lower than in 1989. Entire branches of industry have ceased to exist. Ex-ports have fallen to one third of their value in 1990, while imports havehalved. Almost one third of the prospectively active population is unem-ployed, while there is a large number of refugees and displaced personsin the country. The foreign debt is assessed at some $12.5 billion, whichis approximately the GDP, while at the same time there is a high internaldebt to the population that is estimated over $3 billion. The mutual

11

10 Without Kosovo

claims amongst economic subjects amount to several times more thanthe amount of money in circulation.

Table 1. Gross Domestic Product (GDP) in FRY and Its Use11

1998 1999 2000

Ass

essm

ent

(in

mil

.U

SD

)

Str

uct

ure

in%

Ass

essm

ent

(in

mil

.U

SD

)

Str

uct

ure

in%

Ass

essm

ent

(in

mil

.U

SD

)

Str

uct

ure

in%

Gross domesticproduct

13570 100,0 10152 100,0 11675 100,0

Personal expenditure 11195 82,5 8402 82,7 9219 79,0Public stateexpenditure

2700 19,9 2686 26,4 2630 22,5

Fixed investments 1398 10,3 1112 10,9 1361 11,6Changes in supplies -217 -1,6 -550 -5,4 -110 -0,9Export of commoditiesand services

2858 21,6 1498 14,7 2075 17,8

Import of commoditiesand services

4849 35,7 3296 32,5 3500 29,9

Source: Makroekonomska analiza jugoslovenske privrede (Macroeconomic analysis ofthe Yugoslav economy), Institut ekonomskih nauka, Beograd, June 2000, Internal mate-rial, pp. 101-106.

In a situation where the previous institutions of the state and themarket resemble caricatures, there was huge mistrust in them amongstthe population, which represents a major limitation for trade and, partic-ularly, investments. Nor is there any legal security, and the domestic

12

11 In this table, figures on the gross domestic product (GDP) were used that were calcu-lated by a research team of Monthly Analyses and Prognoses (MAP) of the Institute

of Economic Sciences (IES) of Belgrade as, according to official statistics, the GDP

was overvalued (incompatibility of statistics of prices and the social product).

currency is not convertible, while the banking sector is faced with col-lapse. Privatization was taking place very slowly, and it has not startedin state companies or the banking sector. Overlarge administration ischaracteristic for the entire process, which gives rise to complicated andlong-lasting privatization that has the ultimate effect of the overlargedispersion of the ownership rights of insiders. The degree of mistrust inthe state and market institutions, and particularly in banks, can be illus-trated by the fact that the savings of the population in the banks amountto some $1 per capita.

1.2. Development limitations

The Yugoslav economy has until now been faced with two key

limitations12: (1) the hermetic nature of the economic space, mainly on

account of sanctions that have been imposed on various areas of activity

and foreign trade, and (2) the deplorable state of institutions (legal, eco-

nomic, financial) that represent the infrastructural framework for all

economic processes. In such circumstances there was no room for de-

velopment.

It is possible to identify four gaps in the Yugoslav economy’s pre-vious closed system, each of which individually represents a limitingfactor to development.

a) The accumulation gap – insufficient volume of available accu-

mulation for investment that is essential for the renewal of the

production fund and for working assets. Investments in fixed

capital are today considerably below the level of amortization

of the country’s existing capital fund. Investments in techno-

logical development lag dramatically behind.

b) The foreign currency gap – shortage of foreign means of pay-

ment that are essential for the import of equipment and pro-

duction inputs (accent here is placed on the lack of foreign

13

12 Stamenkoviæ Stojan, Sankcije i njihove posledice (Sanctions and Their Conse-quences), Idejni projekat, IES, Belgrade, 2000.

currency liquidity and not on the lack of accumulation). The

existing gap does not encompass means of payment that

would be necessary if the country had to repay debts due

abroad, including interest.

c) The gap in skilled manpower – shortage of experts of various

profiles that would be able to set production underway in a to-

tally altered environment and with new business transaction

criteria (existence of new, highly competitive economies in

Central and Eastern Europe, the existence of the EMU, the

new Euro composite currency, target system of payment, etc.),

new technological standards, etc. In short, the country lacks

specialized personnel for new technologies and the new com-

munications system (a large number of top experts have gone

abroad), as well as managerial personnel of a new profile. The

existing potential is not up to date due to isolation, for it has

not been able to monitor adequately the accelerated changes in

the individual domains, and it is not probable that it can re-

spond to the new challenges of the world market, and espe-

cially the European market, on the short term.

d) Institutional gap – the economic system is incomplete; there

are no institutions that are able to protect economic subjects,

their property and interests effectively and without discrimi-

nation. Besides that, a banking system with standard functions

does not actually exist; there is no financial market (there is

not even a primary market, not to mention a secondary one);

privatization is far from having been regularly completed; the

passing of macroeconomic decisions is more or less arbitrary

and almost totally subject to non-economic parameters; the

personnel function has been moved from the professional

sphere to the political sphere.

A stagnation of the social product, negative domestic accumula-tion, a fall in investments and their effectiveness, alongside the reduc-tion of investments to 3-4% of the social product – these are the keycharacteristics of the Yugoslav economy in the 1990’s. Due to long

14

disinvestment (investments have regularly been lower than the amorti-zation of fixed assets), equipment in the Yugoslav economy has depre-ciated, capacities are obsolete, their functional capacity has been re-duced, and the economy is without capital for renewal and withoutworking capital to increase production volume, etc.

Due to such trends, the structure of the Yugoslav economy, whichwas formed at the end of the 1970’s, has stayed the same up to the end ofthe twentieth century. Available capacities and their structure have be-come real limitations to economic growth.

1.3. State of affairs in industry and agriculture

1.3.1. Industry

It is a fact that there have been decades of insufficient investment

in Yugoslav industry, which has mirrored the situation in the economy

as a whole. As a result of this, the average share of amortization in the

social product of industry amounted to 29.5% in the period from 1990 to

1999 (on the basis of prices in 1994). At the same time, investments in

fixed assets in industry accounted on average for only 29.1% of amorti-

zation. This means that there was a shortfall of an average of 70.9%

(from 63.6% in 1990 to 78.8% in 1998) in investments necessary to

maintain industry on the level of simple reproduction. That tendency

continued in 1999. Accounts show that at the beginning of 1999 Yugo-

slav industry had fixed assets with the real worth of only 12% of their

value in 1989, which was when Yugoslavia’s industry started its down-

ward path. Corrected accounts put the level of amortization in the social

product of industry at an average of 16.8%, and fixed assets in industry

at around 38% of their real value in 1989. That demonstrates that indus-

trial capacities have been reduced to below 30% of the operative capaci-

ties they had in 1989, which is the extent to which industrial production

itself has been reduced.13

15

13 For greater detail, see: MAP, No. 7-8, IES, Belgrade, 2000, pp. 27-29.

1.3.2. Agriculture

The unfavourable tendencies in the development of Yugoslav ag-riculture date back to 1986. The physical volume of agricultural produc-tion fell at the average annual rate of 0.7% up to 1991, and 1.1% from1991 to 1998. Sugar beet, wheat, sunflower and meat production fell atthe average annual rates of 9.5%, 3.3%, 2.8% and 1.2% respectively.The increasingly unfavourable economic position of agriculture and itssystem of functioning aggravated the problems of disinvestments in ag-riculture and brought about a deterioration in the technical and techno-logical level of agricultural production, which, in turn, resulted in agreater share of natural production, extensive production, the fragmen-tation of the economy, etc. The fall in the value of the overall socialproduct and the fall in the value of the social product of industry, along-side all the other factors, contributed to a relative increase in the share ofagriculture in the creation of the overall social product. The share of ag-riculture in the social product increased from 14.4% in the period from1990 to 1993 to 19.6% in the period from 1994 to 1998. The negativetendencies in the development of agriculture in the past period are ex-pected to continue in 2000.

1.4. External debt

FR Yugoslavia’s specific position (sanctions, unregulated statusin international financial and trade organizations, uncompleted succes-sion with the other republics of former Yugoslavia, etc.) has rendered itimpossible to establish precise figures on the extent of the external debt.On the basis of the state of the debt at the end of 1991 and the fact thatneither principals nor interests have been paid to date, the debt, by add-ing interests to principals, could at the end of 1999 have risen to the sumof between USD 12 and 12.5 billion (out of the debt of the SFRY, only36.5%, the amount falling due to FRY, has been calculated). It is esti-mated that the principal of around USD 7.5 billion is owed as following:IMF, IBRD and other international financial organizations – around

16

15%; creditor governments (Paris Club) – around 35%; commercialbanks (London Club) – around 25%; the remainder of the debt is owedto other creditors. If the principle were reprogrammed with a grace pe-riod and only interests newly coming due on the old debt were paid, thatwould burden the current balance of payments by almost one billion dol-lars. Without part of the debt and the interest being written off, thiswould limit development even given a considerable inflow of capital.14

The total obligations on the basis of citizens’ old foreign currencysavings amount to DM 7.48 billion.

1.5. Macroeconomic stabilization measures and necessaryfinancial resources

Macroeconomic reforms and the reconstruction of the economyin order to achieve a return into the international community are difficulttasks that the newly elected democratic authorities will not be able toperform if they do not obtain powerful domestic and foreign support. Inorder to achieve an improvement in the population’s standard of livingon a permanent basis and justify citizens’ great expectations after thefall of the authoritarian regime, the new government must immediatelystart implementing radical economic reforms. This presupposes mo-mentary monetary reform, a start to a reform of the fiscal system and theimplementation of a rapid privatization program, with at the same time avisible improvement in citizens’ health and social welfare.

Bearing in mind the grave economic and social consequences ofthe break-up of the former Yugoslavia, the civil war and the erroneouseconomic moves of the previous regime, as well as international sanc-tions, the country’s isolation and NATO’s air strikes, it is quite certainthat the costs of implementing economic reforms and the country’s re-construction will not be able to be financed from domestic sources, evenif the new government were to engage all available resources to the

17

14 For greater detail, see: Macroeconomic analysis of the Yugoslav economy, IES, Bel-

grade, June 2000, p. 15.

maximum. On the other hand, even under the most favourable circum-stances, the renewal of FRY’s membership in international financial in-stitutions (IMF and the World Bank) and the resolution of the issues ofsuccession with the former Yugoslav republics will last for severalmonths, which is enough for the government to lose credibility and befaced with grave social dissatisfaction on the part of citizens. This wouldblock its work and result in a public call for abandoning reforms. Thenew government must therefore obtain adequate financial resourcesfrom abroad at the very beginning of its mandate.

The covering of the deficit in public finances in Serbia and FRYin the first year of the functioning of the new democratic governmentwould enable:

• non-inflationary financing of public expenditure and the mac-

roeconomic stability of the economy,

• a positive impact on the country’s economic growth,• the creation of the preconditions for a reform of the entire fiscal

system, and particularly the introduction of transparency of fis-cal revenues and expenditures.

This would at the same time represent clear support on the part ofthe international community to the new democratic government and itscommitment towards the implementation of political and economic re-forms in the country.

The resources needed to finance the deficit in public finances inSerbia, in 2001, amount to USD 942 million and represent 6.9% of thesocial product (see table 3, columns 4 and 8). This deficit can be par-tially financed from domestic sources. On the basis of the rapid sale ofpart of domestic (state and socially owned) enterprises, on the privatiza-tion of which work is already underway, it is possible, in the most fa-vourable scenario, to collect some USD 350 million. The remainingUSD 600 million would have to come from foreign sources. As thecountry’s credit rating will be low, it is not realistic to expect that morethan 100 million dollars could be collected on the European capital mar-ket. The remaining USD 500 million should be provided through the

18

Fund for Macroeconomic Stabilization that would be formed in thescope of the Stability Pact for South Eastern Europe.

Table 2. Financial Assistance for Macroeconomic Stabilization

Financial sources Amounts in million dollars

Privatization proceeds 350

Short-term credits 100

Fund for macroeconomic stabilization 500

Source: Labus Miroljub, Srbija i Pakt o stabilnosti: šta posle sastanka u Solunu (Serbiaand the Stability Pact: what after the meeting in Salonika), Bulletin G17, Vol. 1, br. 6,June 2000.

The resources from the Fund for Macroeconomic Stabilizationwould be used not only to bridge the budget gap, but also at the sametime for the stabilization of the domestic currency. Resources obtainedfrom the Fund would be used to strengthen the Central bank’s foreigncurrency reserves, on the basis of which it would be possible to issue anew convertible domestic currency, while at the same time going over toone of the modalities of a fluctuating foreign currency exchange rate. Arelatively modest level of foreign currency reserves would be necessaryto protect the exchange rate initially, bearing in mind that in the middleof 2000 the real amount of money in circulation (M1) in Serbiaamounted to around only USD 330 million. When assessing the neces-sary foreign currency reserves for the permanent protection of the ex-change rate, the fact should also be borne in mind that a major part offinancial transactions in Serbia are today performed in the zone of thegrey economy (at least 50%), and that the grey economy will be gradu-ally eliminated, i.e. integrated into the formal sector, with the imple-mentation of fiscal reforms.

The introduction of extra-budgetary revenues coincides with thedecrease in the registered fiscal deficit. It is therefore justifiable to doubtthat the existence of extra-budgetary revenues and expenditure

19

increases the actual public deficit, the official extent of which in the lastthree years has decreased from 12.8% to 9.1% of the social product. Fis-cal transparency will be introduced in 2001. All extra-budgetary pay-ments will be abolished, and the extra-budgetary revenues will beincluded in the budget. This will have the impact of decreasing the regis-tered fiscal deficit.

In the wake of the formation of a new democratic government inSerbia and FRY, there is expected to be a relatively rapid revival of theeconomy, which will considerably alleviate the problem of the publicdeficit. Expected growth rates in the social product in the course of thisand next year are 14% and 10%. However, the social product in 2001will still not reach the level from 1998. For that reason, the low level ofthe social product will continue to represent the greatest obstacle in theway of balancing public revenues and expenditures.

In previous years, the quasi-fiscal deficit (losses incurred by pub-licly owned enterprises) accounted for between one half and two thirdsof the total deficit. In 2001, we foresee a liberalization of prices, privat-ization and the commencement of the restructuring of public enter-prises. The quasi-fiscal deficit will be drastically reduced (perhaps eventotally eradicated), but on that account there will have to be an increasein the part of budget resources for social welfare and assistance to theunemployed, that is retraining and the productive employment of thesurplus workforce. This will have the impact of increasing the budgetdeficit.

There will be the elimination of expenditure caused by the unnec-essary tension in relations between FRY and the international commu-nity as well as that of expenditure linked to the repression of citizens.Expenditure on the military will decrease from the present 7% to 5% ofthe social product. This is the percentage that has been established bylaw for many years (even before the break-up of former Yugoslavia).Further assessments of the extent of military expenditure will depend onthe country’s defence strategy to be adopted by the new Assembly. Ex-penditure on the police will be reduced to 1.3% of the social product, asthere will no longer by any reason for the “special use” of police forces,

20

Table 3. Estimates of the Fiscal Deficit and the Necessary Resources

of the Fund for Macroeconomic Stabilization

Public expenditures in Serbia*

1997 1998 1999 2001 1997 1998 1999 2001

In million dollarsShares in

Net Material Product(1) (2) (3) (4) (5) (6) (7) (8)

Defence 853 771 754 679 6.2% 5.4% 7.0% 5.0%

Administration 212 211 180 204 1.5% 1.5% 1.7% 1.5%

Police 399 522 408 173 2.9% 3.6% 3.8% 1.3%

Judiciary 127 100 78 272 0.9% 0.7% 0.7% 2.0%

Education 812 604 478 883 5.9% 4.2% 4.4% 6.5%

Social protection 306 357 220 408 2.2% 2.5% 2.0% 3.0%

Investment 142 135 102 136 1.0% 0.9% 0.9% 1.0%

Pension 2,661 2,722 2,018 2,446 19.3% 19.0% 18.6% 18.0%

Health care 1,400 1,164 978 1,359 10.2% 8.1% 9.0% 10.0%

Labour Market 97 95 80 340 0.7% 0.7% 0.7% 2.5%

Local Governments 799 843 620 815 5.8% 5.9% 5.7% 6.0%

Debt Service 158 1.2%

Others 567 424 328 272 4.1% 3.0% 3.0% 2.0%

Total Expenditures 8,375 7,948 6,244 8,144 60.9% 55.6% 57.6% 59.9%

Total Revenues 7,493 7,444 5,940 7,201 54.5% 52.0% 54.8% 53.0%

Deficit -882 -504 -304 -942 -6.4% -3.6% -2.8% -6.9%

Net Material Product 13,758 14,304 10,835 13,587

Source: Labus Miroljub, Srbija i Pakt o stabilnosti: šta posle sastanka u Solunu (Serbiaand Stability Pact: what after the meeting in Salonika), Bulletin G17, Vol. 1, br. 6, June2000.

* The Republic of Serbia without Kosovo.

on account of which this expenditure has rocketed in the last two years.Instead of useless spending on the purchase of expensive equipment tobe used to exert repression against the citizens of the country (armedtransporters, poisonous gases, demonstration dispersion equipment),the resources will be used to bring about a major improvement in the

21

material position of the police, in line with their increasing responsibil-ity for citizens’ security.

The costs of pensions are the greatest problem facing public fi-nances. It is predicted that there will be a decrease in their share in thesocial product by one percent as against their three-year average. Thiswould enable a slight increase in pensions as compared to 1999, but theirlevel would still be below that of 1997. A further decrease in expendi-ture on pensions is linked to a major reform of the pension system.

Expenditures on education and the health service are to return tothe levels of participation they had in 1997. As we expect acceleratedeconomic growth, expenditure on education should increase by at least0.5% of the social product.

The introduction of independent judiciary and the battle againstcorruption will require an increase in the expenditure on support to therule of law. Due to limited maneuvering space, an increase in expendi-ture of only one percent of the social product is anticipated.

Due to the need for demilitarization, the employment and retrain-ing of the surplus workforce that will come about as a result of the re-structuring of publicly owned enterprises and the liberalization of theirprices, there will be an increase in expenditures on social welfare and thelabour market of 1% and 2% of the social product respectively.

It is planned to start servicing the foreign debt on a regular basisin 2001. If the obligations on debt servicing arising from the Memoran-dum signed with the London Club of creditors in 1998 and the legal obli-gations on servicing citizens’ frozen foreign currency savings areaccepted, the budget obligations so ensuing would amount to 1.2% ofthe social product.

A decrease in fiscal revenue of 1.5% and in expenditure of 1% ofthe social product is anticipated as compared to 1997. They will, how-ever, still be at the high levels of 53% and 59.9% of the social product,respectively. The further decrease in their participation in the socialproduct can only be achieved given accelerated economic growth.

The total fiscal and quasi-fiscal deficit will decrease from 12.8%in 1997 and 9.1% in 1999 to 6.9% in 2001. Its decrease will mainly be

22

the result of the elimination of the quasi-fiscal deficit, so the problem ofthe country’s high budget deficit still remains.

It is not realistic to expect a rapid inflow of foreign capital on thebasis of the privatization of domestic enterprises in 2001. A maximuminflow of USD 350 million can be expected. The candidates for rapidprivatization are cement and tobacco factories, JAT, parts of the oil andchemical industries and parts of EPS (Serbia’s electricity generationcompany).

In the case of lower growth in the social product or the adjustmentof prices of electrical energy over a longer period (over three years, forexample), the estimated deficit in public financing in 2001 could be farhigher. On the other hand, it is possible that the revenues to cover the fis-cal deficit will not be achieved at the level planned. It is, for example,possible that the sale of enterprises in the privatization process might notgo as quickly as expected or that the financial market might not acceptstate bonds to the planned extent. In such a case, thought should be givento the expansion of foreign financial support for the stabilization of theSerbian and Yugoslav economy in the first year of the new democraticgovernment’s mandate.

23

2. TRADE POLICY

2.1. Introduction

The idea that a growth in foreign trade exchange, founded on

rapid liberalization, should represent the basic vehicle for the develop-

ment and integration of countries of South Eastern Europe (SEE) lies at

the basis of a number of proposals, both from international institutions

and from private think tanks. From amongst the many proposals, let us

mention last year’s CEPS document and the Declaration of the Forum of

Institutes from SEE15, the World Bank’s ambitious strategic develop-

ment program for SEE16 from March 2000, and the European Commis-

sion’s pragmatic proposal of June 2000. All these proposals call for the

rapid abolition of all customs and other barriers to trade in the region as

well as in relations between SEE countries and the European Union. In

the CEPS document, which also represents the most ambitious project,

the abolition of EU customs duties is proposed on all imports from SEE

countries by 1.1.2000, while, in the opposite direction, liberalization

would take place on 1.1.2003. The ultimate objective would be the cre-

ation of a common “internal market II”. An official, albeit partial, re-

sponse was, in a certain sense, made to this document through the

European Commission initiative submitted in June 2000 proposing that

the EU introduce “exceptional trade measures” (i.e. supplementary pref-

erential trade measures) on imports from countries involved in the stabi-

lization and association process17. The proposal provides for the

complete abolition of all other customs and other limitations on imports

24

15 A System for Post-War South-East Europe…, op.cit. and Declaration of the “Europa

South-East”…, op.cit.

16 The Road to Stability and Prosperity in South East Europe: A Regional Strategy Pa-

per, World Bank, Washington D.C, March 2000.

17 Council Regulation (EC) No 2007/2000…, op.cit, p. 22.

of industrial products from Bosnia and Herzegovina, Croatia, Albania

and Macedonia18, as well as of the majority of agricultural and food

products.19 The proposal also comprises exports from Kosovo, as a sep-

arate customs territory within FRY, while, as regards exports from

Montenegro, the proposal only encompasses exports of aluminium,

which is Montenegro’s most important export item. After the demo-

cratic changes in Serbia, however, the EU Commission decided in No-

vember 2000 to propose that these measures be extended over the whole

of FRY.

The above-mentioned World Bank proposal suggests the gradual

– two-phase – creation of a free trade zone, both among SEE countries

themselves and in their bilateral relations with the EU, which should

represent the basis of the region’s future development. The first phase

would encompass the period from 2000 to 2003, when the second phase

would commence. To this end, a Stability Pact working group entitled

Trade Liberalization and Facilitation has commenced activity with the

aim of identifying all customs and non-customs barriers in trade rela-

tions amongst countries of the region.20

As is well-known, FRY, or rather Serbia, is not for the present in-

cluded in the scope of activity of the Stability Pact, nor is it included in

EU initiatives towards SEE countries. The state of prolonged interna-

tional isolation, which has in the course of the last year grown into an

open confrontation between the FRY regime and the leading world eco-

nomic and trade powers (USA and EU), as well as the extension and

supplementation of economic sanctions against the FRY economy, have

25

18 Bosnia and Herzegovina, Croatia and Albania benefit from so called “autonomoustrade measures” on imports into the EU. Macedonia already benefits from customsfacilities on the basis of a bilateral agreement on trade and cooperation, which wouldbe expanded according to the new proposal.

19 With the exception of live heifers, beef and fish products, where customs contingentshave been approved.

20 See, for example, Minutes of the Third Meeting of the Stability Pact Working

Group “Trade Liberalisation and Facilitation”, Skopje, 30 June 2000,

http://www.stabilitypact .org

had the effect of the constant distancing of the Yugoslav foreign trade

system from the fundamental rules in force in market economies. The

foreign trade legislation of any country, including FR Yugoslavia, is a

complex and intricate legal system that, in the final instance, is the re-

flection of the short-term objectives of economic policy, on the one

hand, and of the economic structure and longer-term orientation of that

country with respect to the organization of the economic system (“open”

or “closed” economy) and its integration in international economic rela-

tions, on the other hand. We shall later point to the present characteris-

tics of FRY foreign trade and foreign trade system, as well as to the

possible directions for its adjustment in the scope of overall changes in

the system of the FRY.

2.2. Characteristics of FRY foreign trade exchange

The economy of Yugoslavia comes into the category of econo-

mies highly dependent on foreign trade. According to some assess-

ments21, foreign trade accounts for over 40% of the value of Yugosla-

via’s social product. Taking into account unregistered trade (smuggling

and other aspects of illegal activities), the degree of the foreign trade de-

pendence of the Yugoslav economy is far higher. The other countries of

SEE-7 (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedo-

nia and Romania) have an even higher degree of foreign trade depend-

ence (with the exception of Albania). However, intra-regional trade

amongst these countries amounts on average to only 12%-14%, which

reflects the fact of the similarity, and not the complementary nature, of

their production structures. The intraregional trade capacity of the SEE-

7 countries is too small to be able to represent the basis for the rapid and

stable economic growth of FR Yugoslavia.

On the other hand, with respect to economic exchange, all the

economies are orientated towards countries of the present EU. In the

case of Yugoslavia, according to official figures, the EU accounts for

26

21 The Road to Stability and Prosperity…, op. cit.

some 40% of foreign trade exchange.22 Furthermore, the EU market is

too large for its stability to be jeopardized by imports from the group of

SEE-7 countries. In fact, imports from SEE-7 countries account for only

1.6% of the total imports into the EU, while Yugoslav imports account

for only 0.15% of total EU imports. The EU represents the basic strate-

gic factor for an export-oriented stable economic growth in Yugoslavia.

The economy of Serbia (FRY) is highly dependent on imports,particularly on the import of energy sources, technology and reproduc-tion materials vital for the functioning of a large part of the processingindustry (pharmaceuticals, chemicals, textile production, etc.). Foreigntrade is burdened by the general problems facing the economy of FRY:low level of competitiveness and problems in foreign trade balance andthe balance of payments, chronic deficit in trade with abroad, shortageof working capital, non-existence of foreign trade market instrumentson state level (export crediting banks, insurance system in foreign tradetransactions, agencies to promote exports and foreign investments, etc.),rigid legislation, corruption in the administration and the economy, theimpact of political and para-criminal “lobbies”, the broad presence ofthe grey economy, smuggling, etc.

For years exports have not covered much more than half regis-tered imports into FRY, with the result that import transactions are fi-nanced from (semi-legal or illegal) accounts kept by state or privatefirms abroad.

In 1999, due to the NATO’s air strikes, foreign trade exchangefell drastically to a total of some USD 4.8 billion, which represents ap-proximately 60% of the figure recorded in 1998. In the course of the firstseven months of 2000, exports increased by 15.6% (USD 986 million)and imports by some 31.4% (USD 2.2 billion) as compared with thesame period in 1999. Exchange, however, continued to be low as com-pared with the “more normal” year of 1998 and amounted to two thirds

27

22 Bearing in mind that, on account of the implementation of EU sanctions, part of tradefrom FRY to the EU went through special channels (e.g. Switzerland, RepublikaSrpska, Macedonia, Central Europe, etc.), it can be stated with certitude that the EUactually accounts for over half FRY’s trade with the world.

of what it did that year. As compared with 1989, imports in 1999amounted to approximately half and exports to approximately one thirdof what they did that year.

2.3. FRY foreign trade system and relations with SEEcountries

Foreign trade policy in FRY comes under the formal-legal juris-

diction of the federal state23. The foreign trade system of the FRY is

founded on several legal acts and a number of supplementary legal acts,

the most significant of which are the Law on Foreign Trade Transac-

tions, the Customs Law and the Law on Customs Tariff.

The specific nature of the current system in FRY consists, how-

ever, in that three foreign trade systems are in force on the territory of

Yugoslavia, as well as three separate administrations (customs, admin-

istration, etc.): FRY, that is Serbia without Kosovo, Montenegro and the

UNMIK administration in Kosovo.

The basic principle of FRY commodity exchange with abroad isgiven in Article 12 of the Law on Foreign Trade Transactions, Para-graph 1, where the following is stated: export and import services arefree. That means that, a liberal principle of exchange between FRY andabroad is proclaimed in principle. But that is limited on account of thepossibility of the limitation of the quantity of exchange by means ofcustoms quotas and the issuing of permits for specific commodities.Customs, or rather customs tariff is the second key element of the for-eign trade system. The customs tariff of FRY is based on the CustomsLaw of 1992 and published in the Law on Customs Tariff of 1997. It cor-responds to the International Convention on the harmonized system ofnames and code designations of commodities and is in line to a certainextent with the Combined Nomenclature of the European Community.

28

23 On the basis of Article 77, Paragraph 2, Item 2 of the FRY Constitution. According tothis Article, the FRY defines policy, passes and implements federal laws, other regu-lations and general acts in the domain of the foreign trade system through its bodies.

According to the new customs tariff of 1997, customs duties range from0 to 40% (previous separate customs taxes and import taxes were abol-ished, or rather built into the percentage of the single customs tariff).Rates increased by 70% are applied to commodities from countries thatdo not have most favoured status. The arithmetic average of customs du-ties according to the new FRY customs tariff is 16.49%.

Commodity exchange between FRY and Balkan countries couldin principle be divided into two groups: trade is significant with coun-tries of the former Yugoslavia, and particularly with Bosnia andHerzegovina (i.e. with Republika Srpska) and with Macedonia, whileconsiderable potential also exists for possible renewed cooperation withCroatia, and, to a certain extent, with Slovenia. On the other hand, it isnot probable that trade with the “old countries” of the Balkans – Roma-nia and Bulgaria – has a greater growth potential.

Unlike the European Community and as a consequence of inter-national isolation, FR Yugoslavia has to date concluded only a verysmall number of bilateral preferential agreements providing for the for-mation of free trade zones or the abolition of customs duties on thegreatest volume of exchange.

The first and the only such agreement concluded to date is thatwith the Republic of Macedonia dating back to 1996 (an agreement ontrade whereby free trade is realized between the two sides). This agree-ment, only occasionally implemented with difficulty, has enabled themaintenance of relatively significant mutual trade, with the result thatboth FR Yugoslavia and the Republic of Macedonia are in the group ofeach other’s five most important foreign trade partners. In 1999, Mace-donia sought that negotiations be opened on the partial revision of thetrade agreement, in order for it to be adjusted in totality to the rules of theWTO and to EU requirements and practice in this domain.

Although FRY has not yet established diplomatic relations with

Bosnia and Herzegovina, free exchange has long been applied with

Republika Srpska on the basis of an agreement on “special relations” be-

tween FR Yugoslavia and Republika Srpska dating back to 1997. How-

ever, customs and other limitations have been implemented between the

29

two countries as from 1.1.1999, which has nonetheless not completely

closed these otherwise vital links for the Serbian economy. A standard

non-preferential trade agreement has been concluded, but not ratified,

for the present with Croatia, and this agreement includes most highly fa-

voured treatment (similar to those with Romania and Bulgaria). Trade

with Slovenia, with which no arrangement of any kind has been con-

cluded, is in practice subject to various unwritten administrative restric-

tions imposed by the former authorities of FRY and Serbia.

The conclusion of an agreement on free trade between FRY and

Russia, initialled in the course of 1999 and signed at the end of August

2000, is of particular importance for the isolated economy of FRY. The

agreement has been implemented since 1 September 2000 and should

facilitate the competitiveness of exports from FRY onto the important

Russian market. On the long term, however, it could somewhat compli-

cate relations with some other countries, especially in the case of trade

relations, that is integration with the EU, bearing in mind that the agree-

ment with Russia was concluded outside the WTO system and its con-

trol, that is to say it does not take complete account of WTO

requirements for the creation of a “free trade zone”.24

2.4. The level of adjustment of the present foreigntrade system in FRY with European Communityregulations

The hitherto foreign trade system of FRY was to a great extent

non-transparent, very changeable and burdened with various forms of

administrative control and obstacles that prevented the development of

greater foreign trade exchange. There existed, for example, administra-

tive controls of foreign trade transactions (e.g. compulsory “applica-

tion”), the requirement of the separate registration of foreign trade

firms, regimes of quantity and customs limitations, high customs duties

30

24 Neither Russia nor FRY have yet become members of the WTO, although both coun-

tries have submitted requests for membership.

and taxes on imports, strict requirements and controls in the sphere of

foreign currency regulations, conflicts of jurisdiction between republi-

can and federal administrations, “unwritten or unpublished regula-

tions”, that is oral instructions that can derogate written laws and other

regulations25, special terms for trade in agricultural products, the inter-

nal “embargo” against Montenegro, as well as the specific circum-

stances of exchange with Macedonia, Slovenia and Republika Srpska.

One example of typical administrative obstacle in the FRY was the sys-

tem of the registration of foreign (joint) investments of firms, which had

to register three times successively if they wished to deal in foreign

trade.

Regarded on the whole, common trade policy and the customssystem of the European Community have far more liberal characteris-tics than the FRY foreign trade system. This is also logical as the Euro-pean Community is the largest trade power in the world, accounting forone quarter of world trade and realizing in the main a surplus in trade ex-change with the world. Generally speaking, the FRY system is adjustedto the EU system in those aspects that are more of a technical character.In the case of those issues and instruments that are linked to the conduct-ing of economic policy (and to foreign policy to an even greater extent),the differences are greater and, on some issues, exceptionally great. Theissue of the genuine liberalization of foreign trade and adjustment withthe solutions in the EU will inevitably be linked to the speed and the ex-tent of the integration of FRY in the international economy and to thedevelopment of close relations with the European Union.

The basic differences between the systems of FRY and the EU areto be seen in the following:

• average customs rates on imports into FRY are considerably

higher than EU rates (except in the case of agricultural prod-

ucts), which is natural to a certain extent, bearing in mind the

degrees of the competitiveness of the economies;

31

25 Such as, for example, trade blockades with Montenegro or Slovenia, “blockades” of

the work of firms from the EU “white list”, etc.

• quantity limitations on imports (contingents, quotas), which en-

compass almost all industrial sectors have had a major role in

the foreign trade system of FRY to date. In the EU system,

quantity limitations of a systemic character exist only in the

case of textile products (in the period up to 2005), and, possibly,

in the case of certain agricultural products;

• the EC foreign trade system and customs tariffs are highly dif-

ferentiated with respect to relations with individual countries

and groups of countries (various types of preferential customs

tariffs, bilateral free trade zones, etc.). On the other hand, FRY

has to date concluded relatively few preferential foreign trade

agreements, and, therefore, few exceptions from the general

customs tariffs on the import of commodities according to their

origin;

• special payment regimes have an important role in the FRY for-

eign trade system, and these are regulated administratively

(compensation, etc.), as do various possibilities for a decrease

in customs duties or their total exemption from customs duties

(e.g. in the case of foreign investments, agreements on long-

term cooperation, imports of reproduction materials that are not

produced in FRY, etc.). These institutions are the consequence

of balance of payments difficulties or the need for supporting

the development of certain sectors of the economy and are not

known in the EU system.

Besides these major differences, mention should also be made ofthose domains where a considerable degree of likeness exists. These in-volve mainly the customs system itself and the technique of imposingcustoms duties. FRY, for example, uses the “single customs document”taken over from the EU; besides, efforts were made to ensure that theFRY customs tariff to a certain extent followed and was in line with theEU “combined customs nomenclature”, although in that case too we lagbehind; the rules on the origin of products and the certificate on origin(EUR 1) are in some cases (like the agreement between FRY and Mace-donia) taken over entirely from the EU system. In other instances,

32

however, this was not the case (the agreement on free trade betweenFRY and Russia). The system of anti-dumping regulations has beentaken over from the WTO and is therefore also in line to a certain extentwith European Union rules.

2.5. Measures for adjusting the FRY foreign tradesystem to the integration process in the EU –some proposals

The Yugoslav foreign trade system has for decades been orientedprimarily towards the protection of the domestic economy “at any cost”,and, in the last ten years, during the period of sanctions, has also evolvedspecial forms of the grey economy and foreign trade crime. All mea-sures for adjusting the foreign trade system of FRY to the liberalizationprocess in the region, as well as to integration with the EU, would haveto be realized in the scope of the national economic development strat-egy and would be on the following basic lines:

• the country’s membership of the WTO is a priority, as is the to-

tal normalization of relations and the conclusion of bilateral

trade agreements with the EU, with neighbouring countries and

with countries in the region (SEE), including Turkey, and with

EFTA and CEFTA members. Thereby, any possible arrange-

ments on free trade concluded with Russia or other countries

should be legally adjusted to the new situation, that is to WTO

and EU rules (but not cancelled).

• there will be the gradual abolition of customs and quantity limi-

tations (permits, customs quotas, etc.), both unilaterally and in

the scope of the conclusion of bilateral free trade zones. There

should, within this, be the immediate abolition of all forms of

superfluous administrative barriers in foreign trade transactions

(compulsory registration, the compulsory submission of “appli-

cations”, etc.). In the process of liberalization, priority would

go to the lowering of quantitative barriers, i.e. import permits

(this process should not be allowed to last for more than two

33

years, except in extremely rare cases26). In the case of customsduties, the total liberalization of trade in the region, as well as ofimports from the EU, should not be allowed to last more thanthree years, and, in exceptional circumstances, more than fouryears. Liberalization, however, would not totally encompassagriculture and the food industry.

• the foreign trade liberalization program would necessarily haveto be linked to measures for encouraging foreign public andprivate investments and the obtaining of large-scale foreigncredits, as well as the introduction of other instruments of statesupport to the economy in conditions of market functioning,such as crediting instruments and support to production for ex-port purposes27, the introduction of institutions for insuring ex-port transactions, the formation of a foreign trade credit bankand of agencies for the promotion of foreign investments andexports, special measures to support insurance and shipping so-cieties, etc.

• foreign trade liberalization and measures for the introduction ofmarket economy instruments also have to be accompanied byother programmes for consolidating state administration suchas an anti-corruption programme, personnel training, strength-ening state control functions, etc.

• the programme of foreign trade liberalization should also in-clude measures of support to the foreign trade orientation of thesmall-scale economy, facilities for the work of the small-scaleeconomy in this sphere, the crediting of the small-scale econ-omy, etc.

• finally, a separate development programme should be channe-lled towards the implementation of new informatics technolo-gies in international trade (Internet, E-commerce, etc.) by com-panies in FRY, in line with the EU strategic programme on an“informatics society”.

34

26 In the case, for example, of food products important for feeding the population, etc.27 This, of course, presupposes respect in principle for the WTO rules in the domain of

the ban on some subsidies.

3. MONETARY REGIMES AND EUROIZATION

3.1. Autonomy of National Bank

The ultimate objective of adjustment in the monetary sphere is theconvergence of institutional solutions and membership of the EU. How-ever, on account of government policy in the last decade – the abuse ofmonetary policy, the maintenance of high price disparities with the aimof preserving social peace, and large budget deficits – a realistic strategyimplies the introduction of a number of phases in the adjustment processbefore the economy becomes capable of meeting EU membership re-quirements.

The first step in a change in the monetary regime is to secure thetotal autonomy of the National Bank by passing the corresponding legalacts.

Firstly, the governor’s mandate should be extended to seven yearsand the conditions defined under which he may be replaced. It is vital le-gally to define business activities that are incompatible with the perfor-mance of the function of governor or member of the governor’s council:they cannot be government or assembly members on any level (federal,republican or local); they cannot be members of political party leader-ships; they cannot be employed in state administration; they cannot bemanagers or owners of companies, banks or other financial organiza-tions.

It is necessary to redefine the objectives of the National Bank. Thebasic objective must be price stability, and second to that comes themaintenance of the dinar exchange rate. The National Bank cannot beresponsible for accomplishing economic development goals. To thisend, there would also be a change in the regime of crediting domesticcommercial banks with a legal ban on direct crediting. Credits would beallocated, up to a specified maximum sum depending on the commercial

35

bank’s capital, only by means of auction, and access would only begranted to banks capable of providing the necessary collateral and ful-filling the necessary prudential norms and other business criteria.28

In order to heighten credibility among the public, it is necessary

to increase the transparency of the work of the National Bank. Steps

must be taken in line with the recommendations of the International

Monetary Fund.29 The National Bank would publish weekly reports on

the movement of the money in circulation, the exchange rate of the dinar

and other data so that the public might be able to monitor and assess its

policy. Results of policy realized would be published quarterly giving

movements of the selected control indicators. Finally, annual reports

would be published on the definitive balance sheet and the profit-and-

loss account of the National Bank and its intentions with regards to mon-

etary policy for the coming year.

In order for the National Bank to operate as a truly independentinstitution, its balances must be cleared of that part that represents a di-rect heritage of practice in recent decades. In first place is the “old” for-eign currency savings that exist in National Bank liabilities (DM 6.5billion) and which should be proclaimed a public debt of the state. Thiswould reduce part of the costs for servicing National Bank liabilities.Besides that, the unallocated debt and the unallocated claims of the for-mer SFRY would be transferred from the National Bank balance to thestate. Besides, the National Bank’s claims from commercial bankswould also be transferred from the balance to the state if those claimshave a debt to foreign creditors as a counter-position. A minimal posi-tive interest rate would be calculated on all credits the National Bank hasapproved to the state. This would represent a contribution to the achie-vement of a balance of real earnings and expenses of the state sector and,thereby, also a major anti-inflation factor.

36

28 In accordance to the Core Principles for Effective Banking Supervision, Basel Com-

mittee on Banking Supervision, September 1997.

29 Code of Good Practices on Transparency in Monetary and Financial Policies, Exec-

utive Board of IMF, July 9, 1999.

Only after all the above-mentioned pre-conditions to the full au-tonomy of the central monetary institution have been fulfilled is it possi-ble to raise the question of a rational choice of an appropriate monetaryregime that would represent the shortest path to integration with EUeconomic space.

3.2. First phase (12-18months) – floating exchangerate (crawling peg) with internal convertibility

In the first period, the fundamental task in the sphere of monetarypolicy will be to obtain a minimal degree of confidence in the dinar.However, due to the need for removing the main disproportions in thedomain of relative prices (power, infrastructure activities, transport,main food products), this will be a difficult task. In this sense, an inde-pendent Central Bank will be a better solution than the direct introduc-tion of a classic Currency Board regime, as it enables the gradualremoval of inherited disproportions while at the same time absorbingthe inevitable shocks to macro-economic stability and the population’sstandard of living.

The Central Bank will change the policy of obligatory reserves. Itwill first immediately abandon the present practice of using obligatoryreserves as an instrument to cover fiscal and quasi-fiscal deficits. It is es-sential to reduce obligatory reserves to the acceptable level of between10 and 20 percent. There will be the immediate annulment of that part ofthe obligatory reserves that is used to credit the state and finance elec-tricity production. Several different rates for different types of depositswill be introduced instead of the uniform rate.

The health of the national economy is measured in the health ofthe money. In that respect, the initial position will be the same as thepresent one. An exceptionally low degree of monetization of economicactivity that, measured in the relationship of M1 to the GDP, nowamounts to 5-7%, and its further increase, represents the basic point ofreference for the assessment of the success of monetary reforms in gen-eral, and for monetary policy particularly. The dinar will, as is the case

37

today, be undervalued by some 30-35% as compared with a “balanced”level, and foreign currency (the DM in the case of Serbia) will be over-valued by 40-45%. The starting level of M1 monetary mass will amountto approximately DM 800-900 million, while average monthly wageswill amount to approximately DM 100. These figures point to the exis-tence of maneuvering space for implementing a policy to correct the ba-sic structural imbalance.

One of the objectives of monetary policy must be the establish-

ment of the full internal convertibility of the dinar. In the first phase, thiswill most probably be established with a regime of crawling peg ex-change rate as to the DM. This will make it possible for the Central Bankto perform a dual function: to conduct a moderate monetary policy, pro-tecting the exchange rate, while, on the other hand, perform adjustmentsin line with the inevitable inflation that will accompany essential macro-economic adjustment with occasional devaluations of the domestic cur-rency. The rate of exchange itself will be set on the level of 5% to 8%above the black (street) rate, but it will be on a level lower than the trans-fer rate used by companies in mutual transactions. The difference be-tween the buying and selling rates will be minimal, with the result thatthe foreign currency black market will be extinguished and foreign cur-rency will be available only in official premises (banks, exchange of-fices, etc.).

It is not known what Yugoslavia’s National Bank reserves are,but estimates put them at approximately DM 700 million (the value ofone month’s imports). If the resources of domestic banks that are at pres-ent blocked in accounts abroad (approximately DM 600-650 million)and if Yugoslavia (Serbia) were to receive an additional DM 600 millionin the scope of international support to the new government’s economicprogramme, the crawling peg regime would be tenable in the conditionsof the existence of the full internal convertibility of the dinar. Besides, asa result of the growth in real demand for money due to the impact of non-economic factors, and primarily due to change in citizen’s expectations,there will be a change in household’s currency option in favour of thedomestic currency. This will represent a significant factor in the

38

weakening of general inflationary pressures and contribute to crushinginflation.

In the first phase, the dinar will devalue against the DM at a ratethat is less than the expected inflation rate (estimates put it around 50%),but it will remain depressed as against its balanced level for throughoutthe entire period of the first phase. The dinar exchange rate will thus re-main an important vehicle in the policy of a sustainable balance of pay-ments up to the end of the first phase, with the maintenance of certainmargins for further appreciation in the Currency Board regime.

In the first 12 months, thanks to change in economic policy, theinflux of essential foreign resources and the crawling peg regime, thereal money supply will be within the limits of the real demand formoney. This will be achieved mainly thanks to a gradual decrease in thesubstitution of the domestic currency for hard currencies, mainly theDM. The predicted increase in demand for dinars is important as it is es-timated that citizens have approximately DM 4 billion in their mat-tresses.

The first phase would see the legal regulation of the activity offoreign banks and direct foreign investors. This is vital for several rea-sons. Firstly, our banking sector is economically weak with still unde-fined ownership rights. Four to five years will be needed to consolidateit. Secondly, the capital market virtually does not function, and the capi-tal market is of supreme importance for the period facing the new gov-ernment. Thirdly, this would strengthen the trust of the domestic publicin the long-term nature of the new government’s intentions. And, lastbut not least, it would prepare the economy for the euroization process.

3.3. Second phase – transfer to Currency Boardregime

Reflections on the second phase of the monetary regime arefounded on a specific set of hypotheses and are therefore speculation, atleast to the extent to which the conditions themselves are probable that

39

have to be fulfilled in order to achieve the establishment and the effi-cient functioning of a Currency Board.

Firstly, there must be the achievement of political stability re-garded according to the criteria of Serbia’s commitment to Europe. Thecommitment to joining the EU has a major role in this. The new parlia-ment must agree on the introduction of a Currency Board as the best andmost rapid form of the country’s inclusion in Europe (EU), which wouldbring the country an influx of foreign resources and rapid economic re-covery. This political will to sacrifice part of national sovereignty foreconomic recovery and more harmonious economic developmentwould find expression in the adoption of a corresponding law in the newparliament.

Secondly, it is assumed that, before the introduction of the Cur-rency Board, that is in the first phase, there will be the successful resolu-tion of the state’s foreign debt issue; that the governments of Europeancountries (EU) will provide the necessary financial and other assistancein the scope of the Stability Pact for South Eastern Europe in economicrenewal;30 that foreign private investors will show interest in the entire

region and, thereby, also in the present Yugoslavia (Serbia).

The Currency Board would establish permanent parity to the DM,which traditionally serves as reserve currency and as means for all capi-tal transactions among the population. In this way, demand for the do-mestic currency would increase considerably, more so than in systemswithout a Currency Board, for the institution of a Currency Board repre-sents a guarantee to the domestic and foreign public that a long-termanti-inflation policy is being conducted.

It is well known that the mechanism of a Currency Board acts viaautomatic stabilizer instruments – interest rates in the banking system. Ifan outflow of capital occurs there will be a contraction in the offer of themoney in circulation, which provokes an increase in the interest rate,which, in turn, induces foreign investors to invest once again in thecountry with a Currency Board system. And vice-versa. This is in

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30 Declaration on the “Europa South-East”…, op.cit.

essence the same mechanism as in a fixed exchange rate system,whereby the Currency Board system guarantees that there will be achange in interest rates (there is no issue from the Central Bank for li-quidity maintenance). Commercial banks may give credits and mayhave in their portfolio domestic money, foreign currency and otherforms of financial assets in their field of activities.

An increase in the economic credibility of the authorities, low in-

flation and low interest rates are the evident advantages of a monetary

regime based on the institution of Currency Board. Thus, by introducing

the DM as a reserve currency, the inflation rate and interest rates would

tend to become the same as those rates in force in Germany. Further-

more, the state would retain the monetary income from the actual print-

ing of money (even in conditions of total price stagnation), the so-called

“seigniorage” that would be forfeited if a foreign currency were directly

introduced as a means of payment on one’s territory. However, the price

of adjustments to conjuncture fluctuations is transferred in the first in-

stance to the banking sector. Bearing in mind the already mentioned

state of affairs in the domestic banking sector, it is important that a num-

ber of prominent world banks be present at the moment of the introduc-

tion of the Currency Board on the domestic monetary market. The

Currency Board system annuls part of national sovereignty as the na-

tional subjects (monetary authorities) lose the possibility to influence

economic activity through monetary policy (they cannot exert any influ-

ence on the fluctuation of interest rates through the amount of money in

circulation; they cannot bring about a change in the exchange rate with a

view to encouraging exports; they cannot have any impact on the level

of obligatory reserves). Adjustment takes place through the levels of

wages, prices and employment volume, which is a slower and more

painful process than active monetary policy. This is true in the case of

net outflow of capital. It seems, however, that in the case of Yugoslavia,

in a changed institutional regime, it is anticipated that there will be a net

influx of resources, at least in the period necessary for the renewal and

modernization of its economy.

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3.4. The Euro - view into the future

The “Euro” is the new European currency. Additional macroeco-nomic criteria that are binding upon all EU member countries have to befulfilled for the introduction of the Euro as a currency in which all inter-nal and international payments are performed. In order to become a userof the Euro, which is issued by the European Central Bank, Yugoslaviamust, in addition to other criteria foreseen for joining the EU, satisfyfour basic criteria as provided for in the Maastricht Treaty of 1992.These are: (1) price stability, that is a low inflation level (up to 1.5%above the average recorded in the three most successful EU membercountries); (2) a low interest rate on long-term credits (up to 2% devia-tion compared to the average of the three most successful EU membercountries); (3) the state of affairs in public finances has to meet specificcriteria (a budget deficit of at the most 3% of the GNP, while the totalpublic debt may not exceed 60% of the GNP, or in the case of a countryquickly coming close to these criteria); (4) an exchange rate of the do-mestic currency that may not devalue in a period of two years before thecountry enters the Euro system).

As it has already been stated, the monetary regime in the Cur-rency Board system ensures the automatic convergence of the dynamicsof the general price level and the extents of interest rates with the dy-namics of the country whose currency has been chosen as a reserve one.In the case of Serbia, this would be the DM, the currency of an economythat is marked by stability and that, thanks to its strength, determines therate and trends of European integration. The currency exchange rate inthis regime is, by definition, unchanged. Nor would there be any prob-lems with respect to a budget deficit in the system of an orthodox Cur-rency Board system, as the state is only in a position to spend as much asit earns. If old foreign currency savings are proclaimed a public debt,and if the state’s external debt is added to this, then the state of the publicdebt (now about 100% GNP) is far above the criteria required by the EU.If one assumes a dynamic increase in the GNP and an unchanged state in

42

the foreign debt, it is clear that this criterion too could be fulfilled in theforeseeable future.

There remains the other side of the Euroization process – the so-cial programme. In the adjustment process, the entire burden and ma-neuvering space for subjects of economic and social policy lie on thefiscal side. Without medium-term EU assistance in this sector, theEuroization process will remain merely a dream.

Some of Serbia’s neighbouring countries have already introduceda Currency Board system (Bosnia and Bulgaria, while Montenegro hasintroduced the DM as means of payment) or have submitted requests formembership in the EU (Hungary, Romania, Bulgaria). On the otherhand, the EU has a natural inner tendency to expand. Both the countriesof South Eastern Europe, where Serbia belongs, and the EU are facedwith the task of making the process of the integration of the entire regionas prompt and painless as possible.

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4. RECONSTRUCTION AND INVESTMENTS

4.1. Introduction

Investment strategy and the reconstruction of Serbia’s economyand infrastructure should make it possible to make use of the remainingeconomic and industrial potential and to activate potential growthsources. The strategy takes account of the regional component, whichreduces of the importance of state borders and influences as well as thecircumstance that the economic situation is very bad at the moment. It is,of course, based on the annulment of all restrictive political and eco-nomic measures to which Serbia has been subjected and which are not inline with the proclaimed regional approach of the EU towards SouthEastern Europe.

The regional component of investment strategy is the result of theheightening of aspirations in the region towards new forms of economiccooperation and the globalization of economic activities and technolo-gies; but it is also a result of conditions imposed by the EU. For that rea-son investment strategy takes into account the limitations imposed bythe policies of the individual countries of the region, mainly in thesphere of the development of infrastructure.

The economic collapse of the economy in the last two decades hasalso been reflected in a dramatic fall in investments in the economy andparticularly in the infrastructure. The stagnation of the social product inthe 1980’s caused a slow-down in investments in the economy, and es-pecially industry, as well as the abandonment of large infrastructure pro-jects. The deep-seated economic crisis in the 1990’s, accompanied by ahuge fall in the GDP, also rendered investments in industry impossibleand further aggravated the bad situation in the infrastructure. For one de-cade FRY has had a negative rate of net investments (new investments

44

are lower than depreciation). The share of investments in the socialproduct fell from 19.5% in 1991 to 10.6% at the end of that decade.

Table 1. Basic Macroeconomic Indicators in FRY (1992-1999)

1992 1993 1994 1995 1996 1997 1998 1999*

GDP (mil $) 18.696 13.169 14.285 15.285 16.477 18.146 18.491 14.224Investments(%)

-29.9 -37.6 -12.0 -3.7 -5.7 0.8 -2.2 -16.1

Employment(%)

-4.5 -3.7 -2.9 -2.9 -1.7 -3.1 -2.5 -6.9

Inflation rate(%)

9,237.0 **116.5 0.0 74.1 93.1 18.5 29.8 42.4

Averageearnings ($)

90.0 31.9 78.8 95.7 125.0 124.2 88.8 46.7

Source: Official uncorrected figures from the Federal Institute of Statistics.* For 1999, figures are given for FRY without Kosovo.

** In thousands of index points.

Even resources for the capital maintenance of existing capacities

became insufficient in the second half of the 1990’s. A sudden deteriora-

tion took place in the spring of 1999 when parts of industry and the infra-

structure were physically destroyed due to NATO air strikes. Direct

economic losses are estimated at some $4 billion31.

4.2. Possible advantages

In a situation where domestic resources for investment will not besufficient for a relatively long period and where part of the capacitieshas been destroyed, foreign capital is the only way to achieve a rapid re-covery of the economy. Given the bad situation, even compared withneighbouring countries, it is necessary to find and make use of possible

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31 Završni raèun (Final Account), G17, Stubovi kulture, Belgrade 1999.

advantages that could help attract investments. The potential advantagesthat investment strategy should make the most of are:

• absence of transitional recession, for development will be a

combination of recovery and transition, which enables stable

growth;

• central location in the region;• relatively high-quality workforce.

The relatively low level of economic activity in FRY demon-strates that the price accompanying transition has been paid (althoughthere can be no mention of transition in FRY, with the partial exceptionof Montenegro). Recovery after the air strikes and the emergence of thecountry from lengthy isolation create a favourable economic and invest-ment climate. Initial signs of permanent and stable growth are of vitalimportance for investors, particularly if they are accompanied by rapidand comprehensive reforms.

The fact that the country has a central position in the region, com-bined with the shortest travel routes on two European corridors, one ofwhich cannot be skirted, make considerable investments in infrastruc-ture probable. Besides that, part of the infrastructure (most of the roadson corridor 10 and electricity transmission) has already been built,which also makes investments in completion, revitalization and techno-logical improvement probable in a short space of time.

Besides an abundance of very cheap manpower, it can also bestated that there is a relatively high-quality workforce in FRY today.There are three basic reasons for this claim. Firstly, the former Yugosla-via had a large military industry, albeit insufficiently sophisticated,which required its own development and a high-quality workforce. Sec-ondly, many years of contact with technologies of developing countrieshas created a specific technical level, especially amongst engineers andcivil engineers. Thirdly, the education system, especially in the case oftechnical sciences, had until recently been forming a new and high-quality workforce. This, however, has been somewhat undermined bythe fact that a huge number of workers do not work and a large numberof university-educated persons have left the country.

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4.3. Time periods

Investment strategy also takes account of FRY’s very bad reputa-tion amongst investors. Examples of earlier incorrect conduct towardsinvestors and the retroactive cancellation of privatization have givenrise to a good deal of restraint on the part of investors, and this will re-main for a certain period after political changes. This situation makes itnecessary for investment strategy, construction and the renewal of theinfrastructure to be split into time segments.

As a result of the many unfavourable circumstances in the periodof about two years after political changes, it is hard to expect a larger in-flux of private investments. In this period, it is necessary to make possi-ble the country’s inclusion in international financial and politicalorganizations and, especially, in all regional economic arrangements.Economic growth in this period will be the result of the lifting of sanc-tions and the establishment of links with the world. But it will also be aresult of the activation of the population’s now hidden resources. Priva-tization of small-scale and medium-scale companies will be started and,to a considerable extent, completed. This is at the same time a period ofaccelerated transition, whereby under this term we mean the creationand consolidation of state and market institutions, which has a certainpriority over the achievement of the economic growth rate. Foreign in-vestment resources are mainly expected for the repair of the regionaland urban infrastructure, which may come from European banks and, toa lesser extent, from donors. Growth rates in this two-year period couldbe high (10-15%), but it is far more important that this should be a pe-riod of the establishment of credible market and state institutions and thestart of a period of the restructuring of the economy of FRY, and particu-larly its industry.

After this period, direct investments, mainly from private

sources, will become greater32. This is the period in which large compa-

nies and the greater part of infrastructure monopolies will be privatized.

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32 This refers to the period up to 2010.

That is why investment strategy is founded on the creation of favourable

conditions for investments in the infrastructure, privatization and the re-

structuring of large companies, as well the attraction of new investors.

Besides this, work on European corridors in FRY, which encompass

motorways, the Danube (the navigation route and the ports) and, par-

tially, the railways, will be started and completed. This is a period when

a major part of donations, and, to a lesser extent, investments, will be

channelled from the sphere of social assistance into education. A stable

institutional framework and the expectation of further economic growth

enable grass roots investments that will considerably change the struc-

ture of the economy. The growth rate in this period (2002-2010) is none-

theless lower and could range from 5% to 7%. The reason for the lower

growth rate lies in the vital restructuring of large companies, which will

inevitably lead to a reduction in capacities and, thereby, in production.

4.4. Ways of attracting investments

By stating that the strategy of attracting investments counts on acombination of recovery and transition, which should create a favour-able and stable environment for investors, there has also been the defini-tion of the two basic ways of attracting investors. The first lies in theprivatization of existing companies, which is only partially a develop-ment issue, but it is nonetheless one of the central issues of transition.Privatization in Serbia to date has been channelled towards insiders, butits ultimate results have been minimal. The new legal project of privat-ization (for the present one cannot be corrected even with the best will inthe world) must be favourable for foreign investors, that is to say it mustbe founded on the sale of companies. Although this conclusion stemsfrom the fact that the foreign debt is enormous, budget income shouldnot be allowed to be the basic reason for privatization. Increased effec-tiveness should be more important as a criterion of privatization, whichmeans that foreign industrial firms (strategic investors) need to be moti-vated to emerge as the most important participants in privatization. Thiswould to a certain extent prevent the occurrence of tradesmen, whose

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time frame is short and who could gravely threaten the future of compa-nies, from appearing as company purchasers. Strategic investors can re-structure bought companies relatively quickly, successfully and at alower cost.

Even the best privatization nonetheless partially petrifies thegiven economic structure. Foreign investors bring needed knowledgemainly in the domain of technology and management, but, generallyspeaking, do not introduce radical changes into the production pro-gramme. As the structure of industry has changed a great deal in the lastten years, even such a great change as privatization is not sufficient tocreate an industrial structure that would make the most of the existinghuman capital.

That is why investments in new companies and new industries arethe key to investment strategy and the basic development issue. In orderto attract investments in new companies, FRY has to remove or reducethe barriers to trade and investment, as well as the barriers to entranceinto work.

In order for our country to be part of the global information soci-

ety, a national information infrastructure (NII) and strategic information

systems must be built up, the structure of the economy changed and the

population educated. The modernization of the telecommunications net-

work and the establishment of NII cannot be achieved without major

capital investment. Private capital and the participation of international

finance institutions can be secured by promoting the legislative base and

other factors guaranteeing favourable conditions for foreign investment.

The strategy for the development of informatics in FRY is pro-posed as follows: the linkage of Yugoslavia into the global informationsociety by the development of NII as the precondition for the restructur-ing of the FRY economy and raising competitiveness; continuing theprocess of the abolition of state monopoly and creating conditions forpermanent competitiveness as the driving force for the development ofNII; research and development as the key to innovations, productivityand growth; enabling a simple approach to NII services; the develop-ment and promotion of Yugoslav culture; information literacy and the

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creation of the culture of life-long learning; the development of strategicinformation systems, particularly in state bodies, the economy, health,transport, in the sphere of the management of natural resources and en-vironmental protection; creating conditions for the development of ademocratic society and the protection of the rights of individuals, as wellas for the use of information technologies for the reorganization of statebodies and enhancing accountability, effectiveness and transparency inthe work of all public services.

Barriers in trade in the region are linked to political issues, that ismutual recognition and regulation of relations. We therefore assumethat FRY will, in a relatively short period, endeavour to remove the po-litical causes of these barriers. Only in conditions of free and unhinderedtrade in the region is it possible to expect the emergence of large inves-tors in new branches of industry where economy of volume or economyof scope is marked.

Barriers to investments can only be removed partially. Althoughliberal laws on investments are relatively easy to adopt, their implemen-tation, and, particularly, the legal protection of investments will be prob-lems that are not easy to solve. It is possible to lessen the highinvestment risks, arising from the absence or weakness of institutions inthe region and in FRY, by creating international institutions and meth-ods of guarantee and insuring investments in the region. It is possible tocompensate for the lack of reliable financial institutions only with therapid emergence of foreign banks, which will be particularly encour-aged. High investment risk will remain a longer-term characteristic ofthe region.

Barriers to the entry into business in the region are many and canonly be partially reduced. Essentially speaking, the barriers are not highas concerns the actual foundation of enterprises, but they are present asconcerns the maintenance of successful and continuous business. That iswhy a large number of private registered companies in FRY has notbeen activated or work on the brink of profitability. The absence or badfunctioning of institutions and the many economic and non-economic

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risks in which FRY abounds are the true barriers to the development ofentrepreneurialism.

Investment strategy based on direct foreign investments throughprivatization and, primarily, new companies, can ensure a doubling ofthe GDP in a ten-year period. In order to attract direct foreign invest-ments there must be a reduction of tax and customs rates, tax grace peri-ods, encouragement of investments in propulsive branches and thepossibility for foreign land ownership. These measures must be accom-panied by an active industrial policy, the aim of which is to attract strate-gic investors. The success of this strategy depends vitally on the initialtwo-year transition period during which credible state and market insti-tutions must be created.

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5. THE SOCIAL SECTOR33

ANDDISADVANTAGED GROUPS

5.1. Introduction

The situation in FRY/Serbia concerning social welfare is dra-matic, just as it is in the domains of economy and politics. The numbersof unemployed, sick, pensioners, refugees and displaced persons, wel-fare cases and other socially disadvantaged and poor citizens of Serbiaare greater and greater, while at the same time the crumbling system pro-vides them with less and less protection. Social and health care institu-tions and institutes and pension insurance funds are in a lamentablestate, and the resources paid into them from various sources are smalland arrive late. Although the (lack of) protection afforded to the variousgroups differs, as does the very nature of the contributions, all categoriesof the disadvantaged population are left to a great extent to find theirown methods of survival, outside the system of social solidarity, whichrepresented one of the basic strongholds of ruling ideology for 50 years.

The great increase in poverty in Serbia has been caused by a num-ber of factors - the huge fall in the social product, the population’s mea-ger earnings from all sources, the deformation of the social insuranceand social welfare system, the increase in unemployment, the loss ofpersonal savings (frozen foreign currency savings, pyramid savingsschemes), inflation and the actual long-term nature of the crisis. Thenumber of people that are not able to meet their basic needs is rising, and

52

33 The social sector encompasses domains where great importance is traditionally at-tached to the principle of solidarity, which has a decisive impact on the role of thestate, the method of financing and the redistribution of resources. According to such aconcept, the social sector includes education, health, social welfare and the pensionsystem.

the number of persons just above the poverty level is ever greater, whilethe middle class has virtually disappeared.

According to the criteria of minimum food requirements, and onthe basis of a regular questionnaire carried out by the Federal Institute ofStatistics, it is estimated that approximately 2.8 million of the popula-tion are poor, that is to say that one in three of the population of CentralSerbia and Vojvodina is not able to meet his/her basic requirements. Inthe last decade, poverty has become a markedly urban phenomenon, asrural households are at least able to provide themselves with food.

Due to the absence of any social welfare system, the poorestamong the population have become greatly dependent on internationalhumanitarian assistance. The number of persons to use soup kitchens,which are mainly financed by international organizations, has increasedmore than three-fold in recent years and now amounts to over 100,000.

The social welfare system has shared the fate of the entire social

sector in Serbia, that is to say it has not undergone any changes either in

the sphere of functioning, the method of financing or even with respect

to the more active inclusion of other factors (except the state, which is

included in the protection of the most disadvantaged groups). There

have therefore been no major changes in the criteria according to which

a person is considered as being socially disadvantaged. Such criteria are

founded on earnings from regular sources and they do not include earn-

ings from the grey economy, whereas earnings from the grey economy

actually represent a coping mechanism (a vital means of survival) not

only for the poor but also for the entire population.

While the number of poor has more than doubled as comparedwith the beginning of the 1990’s, the number of recipients of social wel-fare has decreased by nearly a third. This decrease has been particularlyevident in the number of recipients of direct material assistance, as therehas been a constant decrease in average earnings, which are the criteriafor deciding who is disadvantaged. On the other hand, on account of thefact that payments are invariably late, in conditions of permanent infla-tion the sums that are calculated according to previous year’s earningsare worth next to nothing when they do arrive. Social assistance for

53

nearly 100,000 disadvantaged persons was not paid in 1998 at all, and itwas only paid for some months in 1999, to the sum of just over four USdollars per month. Child allowances are small (around 10 US dollars permonth), and a “solution” has recently been found to make up for theirbeing over one year late through the issue of state bonds.

5.2. Unemployment

Unlike other countries in the social bloc, open unemployment ex-

isted and grew continuously in the former Yugoslavia and in Serbia

from as far back as the middle of the 1960’s. In the 1990’s, however, un-

employment assumed huge proportions and more and more unfavour-

able characteristics, reaching and exceeding the rate of 20%. According

to the latest available figures, there are over 720,000 unemployed per-

sons in Central Serbia and Vojvodina, and the unemployment rate

stands at over 25%. However, only 6% of the unemployed receive un-

employment benefit, which amounts on average to some 25 US dollars.

Benefit is only received by persons that were previously employed, and

it is received only for a few months, the duration depending on the

length of time the person had worked.

This picture of unemployment is not, however, a true one asamongst employees there are a number of workers on so-called paidleave, and there is a high level of hidden unemployment, while, on theother hand, a considerable number of both employed and unemployedpersons work in the grey economy. According to the results of variousquestionnaires, between 20% and 40% of the unemployed work in thegrey economy.

The efforts of the state in the domain of the labour market havebeen channelled in the main towards preventing a fall in employment,that is towards maintaining the status of formal employment for the larg-est possible number of workers. The decrease in the number of em-ployed persons in the last decade is, therefore, mainly the result of so-called natural drain, while the number of persons to have been dismissedby their employers is small, particularly bearing in mind the real

54

economic situation. The dismissal of workers was actually formallybanned in certain periods, such as, for example, in the period of hyperin-flation in 1993. Furthermore, in certain periods the resources of the In-stitute for the Labour Market were mainly channelled towards surplusmanpower, that is to workers already formally employed.

5.3. Pension system

If the unemployed by very definition come under the category ofpotentially disadvantaged in any system, this is certainly not the casewith pensioners. In Serbia, however, most pensioners come into the cat-egory of socially disadvantaged persons. They are disadvantaged notonly because their pensions are low and insufficient to meet their re-quirements and because they do not arrive on time, but also because,given their age and health problems, they are not as capable as others offinding additional sources of income, by engaging in the grey economy,for example.

Relatively speaking, Serbia has a large number of pensioners, ap-proximately 1.5 million. This number is only partially due to demo-graphic trends and the ageing of the population, and is actually the resultof the liberal retirement policy conducted in the past.

The pension system is Serbia is founded on equality of incomesand expenditure, that is on financing pensions from current earnings (thePAYG system). The ratio between those who pay contributions and thenumber of pensioners is exceptionally unfavourable, and in recent yearsincomes have covered expenditure by between 80% and 90%. There arenot sufficient resources for the relatively low pensions, despite variousmethods having been found to help the system function (the introduc-tion of special taxes, the payment of pension arrears in coupons for elec-tricity and fuel, the payment of less than 12 pensions a year, etc.).

Income tax and contributions are very high (over 25%) in order tosecure resources to pay pensions, which puts Serbia amongst thosecountries with the highest contributions. On the other hand, pensions inSerbia are low, with a tendency to fall even more. Since 1996, when the

55

average pension was nearly 90 US dollars, it has decreased threefold,and the average pension today is around 30 US dollars. It must, how-ever, be noted that nearly two thirds of the pensions are lower than thataverage. Amongst the most disadvantaged are one-member pensionerhouseholds and households where the pension is the only source of in-come, where there are supported or unemployed persons besides pen-sioners.

5.4. Education and health systems

Besides the pension system, the education and health systems arealso on the brink of collapse, and additional pressure is exerted on thesesystems by refugees and other persons that sought refuge in Serbia dur-ing the wars in Croatia and Bosnia and Herzegovina. The two sectorshave a number of common characteristics: dilapidated capacities, equip-ment of a low and unsatisfactory level, low wages and exodus of the bestpersonnel, expanding corruption and bribe-taking, absence of rationaland efficient direction and modern management, exceptionally highlevel of centralization, the undefined position of the private sector, out-dated programmes and methods of functioning and financing, and theabsence of any attempt at reform.

Frequent shortages of medicaments and medical materials in cer-tain periods have brought about conditions where only the most urgentinterventions are carried out. A larger and larger number of persons, par-ticularly where the health service is concerned, are compelled to pay forservices through additional, irregular channels, to buy medicaments andmedical material for operations, as a result of which the concept of so-cial insurance is losing all sense. The impoverished section of the popu-lation has less and less access to health services and is not able to obtainthe necessary medicaments. Essentially speaking, this section of thepopulation is for the greater part excluded from the system of social wel-fare. Paradoxically, the system is used to a greater extent by the richerparts of the population, either because they are able to offer “additional”

56

payment or because they use personal contacts to gain access to ser-vices.

All this has been reflected in the state of health of the population.In the 1990’s female life expectancy fell for the first time in the region ofCentral Serbia and Vojvodina, while male life expectancy too has fallenin recent years in Vojvodina. The fall in the infant mortality rate that hadbeen underway for several decades in this region was halted in 1992,when there was a considerable increase in infant mortality. It was notuntil 1995 that the infant mortality rate fell to what it had been in the pe-riod before the crisis. There has also been an increase in the morbidityrate of a number of illnesses.

5.5. Refugees and displaced persons

If we add the figures referring to refugees, displaced persons andall those that have settled in Serbia in the last ten years, regardless oftheir official status, to the figures on disadvantaged categories of the lo-cal population, the total number of potentially disadvantaged categoriesrises dramatically.

According to the figures obtained in a census of refugees in Ser-bia at the end of 1996, there were approximately 618,000 refugees andother war-endangered persons from Croatia and Bosnia and Herze-govina, the majority of whom are estimated at still being in Serbia. Fur-thermore, according to UNHCR figures, there are at present over180,000 displaced persons from Kosovo and Metohija in Serbia.

According to research carried out in 1997, over 300,000 refugeesdid not have sufficient food, and at least 50,000 were on the brink ofstarvation. The most disadvantaged groups are certainly those refugeesaccommodated in collective centres, households of exclusively old per-sons, and households with small children without any regular income.

As many as 40% of the refugee households did not have stablesources of income and depended on humanitarian assistance and the as-sistance of friends and relatives. A large section of the displaced personsfrom Kosovo and Metohija are certainly in these groups today.

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The state’s efforts in the direction of refugees and displaced per-sons have mainly been channelled towards providing humanitarian as-sistance and towards coordinating international assistance. Refugees areincluded in the country’s education and medical care system, but virtu-ally nothing has been done concerning their total economic and socialintegration. The unsolved issue of citizenship continues to rise up as amajor obstacle, although, after several years in Serbia, it is evident thatmany refugees will not return to the regions they abandoned.

5.6. Directions of reform

A review of the state of affairs in the social sector shows that thediscrepancy between the normative and the real is great, that the sector,basically speaking, does not provide welfare but only alleviates to a cer-tain extent the position of the disadvantaged categories of the popula-tion. For the greater part of the sector, it could be said that there existsonly a semblance of functioning and the remnants of a collapsing sys-tem. The absence of any changes renders the role of the social sectormeaningless and ultimately leads to differences in the access of certaincategories of the population to both welfare services and the welfaresystem.

Role of the state. Speaking in principle, reforms in the social sys-

tem would have to evolve in several directions. The first such direction

would certainly presuppose a change in the role of the state. The state

should not be the sole organizer, financer and “producer” of social ser-

vices, but there are still a large number of functions that the state doubt-

less has to continue to perform on a quasi-social market.

The state must retain its legislative role in the sphere of the formu-lation and implementation of laws, the formulation of basic criteria, andin the domain of the construction of institutions. The state should createbasic policies, make strategic decisions on resources and supervise andanalyze the level to which social requirements are met. The more the so-cial sector acts according to market mechanisms in order to raise

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efficiency, the greater the need for state regulative control in order to re-tain the basic positive characteristics in the sector.

A reduced and changed role on the part of the state is directlylinked to the increased possibilities of individuals to choose and to bearthe consequences of their choices. The reduction of the role of the stateand the increase in the responsibility of the individual in the social sectoractually means the establishment of a corresponding relation betweenindividual responsibility and solidarity. Every individual has to take ac-count of himself and his own future, while, through its functions, thestate has to ensure that “irresponsible” individuals do not threaten publicwelfare (such as, for example, the health and the education level of thesociety as a whole), as well as to help those that are not able to care forthemselves or are faced with particular, unforeseeable circumstances.

The introduction of market mechanisms. The transfer of part

of the functions to the private sector and non-governmental organiza-

tions, and the introduction of competition in the social sector are some

of the preconditions for such conceptual changes. The market must be

introduced in various parts of the sector: in financing, in some of the ser-

vice provision segments, in the sphere of allocation instruments on the

basis of which resources are distributed to those who provide services,

and even in some parts of the system (such as, for example, mainte-

nance, cleaning and transport). This would, for example, mean the in-

clusion of private schools in budget financing (which would also

possibly be allowed to charge extra for their services), the inclusion of

private medical practice in the health insurance system, the greater par-

ticipation of humanitarian and other non-profit organizations in social

welfare, etc.

Privatization. The issue of the privatization of certain parts of

the social sector arises as one of particular importance. Is it possible and,

if so, to what extent is it possible to privatize part of state-owned (so-

cially-owned) property in this sector? Which principles and which

methods should thereby be respected? To what extent can private and

non-governmental organizations, etc. be allowed to rent premises or

borrow equipment?

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Participation. A change in the participation of the individual or

the family represents a particular aspect of reform in education and the

health service. Potentially speaking, great resistance exists amongst the

public and politicians concerning the decision to introduce school fees

or supplementary payment in the health service. The widespread nature

of informal payment for services in these domains demonstrates, how-

ever, that the transfer of costs in the form of informal payment exists in

reality, the only difference being that it is not admitted publicly.

Decentralization. Given the high level of centralization, it is also

essential to set underway decentralization processes in all spheres, re-

gardless of the degree to which the state will continue to be the dominant

factor in the social sector. Decentralization can be defined as the transfer

of certain functions in the domains of planning, management and deci-

sion-making from the national to lower levels. The ultimate form of de-

centralization presupposes citizens’ participation and their impact on

local authorities, the possibility of being able to choose a doctor or a

school, the possibility of being able to choose a type of insurance, and

the democratic control of finances and service quality. Non-

governmental organizations can play an important role in this process.

In order to make participation possible and effective, transparency must

be guaranteed in the work of state institutions; all institutions have to be

monitored and controlled, the public must be well informed, public

opinion must be sought on certain issues and, finally, feedback mecha-

nisms must be introduced, i.e. reaction to citizens’ complaints. The level

of decentralization, however, must not be such that it threatens mini-

mum standards or leads to great differences in the quality of services or,

in the extreme case, to jeopardizing medical care and education, for

these are areas of public welfare.

Pension system and unemployment insurance. Such funda-

mental changes would also lead to changes in the pension system. One

of the possibilities is the formation of pension funds that would exist

parallel to the public pension fund. In this case, the public fund on the

PAYG principle would ensure minimal pensions, performing a redis-

tributing function, while private funds, which would function on the

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basis of capital funding, would provide pensions depending on the state

of affairs in individual accounts at the end of the working life. Similarly,

changes can also be introduced in the domain of unemployment insur-

ance, with the compulsory allocation of resources to individual ac-

counts, from which resources could be drawn under specific

circumstances, in the case of notice or dismissal. The funds could also

be private, with the state undertaking to guarantee minimum compensa-

tion if the individual resources from the accounts are spent.

The criteria of social disadvantagedness. In the scope of social

welfare, besides the conceptual changes that would arise as a result of

the reduction and change in the role of the state, the introduction of com-

petition (including non-governmental and even private organizations in

the welfare system), decentralization, etc., it is also vital to look into a

change in the criteria of social disadvantagedness. The direction that this

change will take will depend, among other things, on the extent to which

the grey economy is widespread and, in that context, the validity of earn-

ings from regular sources, as one of the basic criteria. It is quite certain,

however, that a definition of the criteria must improve the system’s ca-

pacity to achieve its target functions and simplify administrative proce-

dures.

Integration of refugees and displaced persons. Finally, special

solutions must be sought for the social and economic integration of refu-

gees and displaced persons. The integration programme must be devel-

opmentally orientated, so designed as to minimize conflicts of interest

between refugees and the local population, with a clear definition of the

legal and institutional frameworks, primarily the resolution of the ques-

tion of nationality, and clearly defined sources of financing and method

of mobilizing resources, including the construction of specific financial

and credit mechanisms. Within the programme, particular attention

must be devoted to the resolution of the issue of the property of refugees

and other war-endangered persons located in the territories they aban-

doned.

Bearing in mind the gravity of the social problems in Serbia todayand their importance in an assessment of the success of policy, it is clear

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that changes in the social sector and in the welfare of the most disadvan-taged groups will be of great importance for any reform-orientated gov-ernment. The formation and functioning of the social sector will dependto a great extent not only on the speed of economic recovery but also onideological orientation and the commitment to a “social” or “conserva-tive-liberal” state. Regardless of that, however, the existing system mustbe reformed.

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6. LEGAL AND INSTITUTIONAL ADJUSTMENTSTO EUROPEAN UNION STANDARDS

6.1. Adjustment of basic constitutional solutions

The process of the institutional and legal adjustment to the stan-dards of the European Union was conditional upon a change in the rul-ing regime in Serbia/FRY. No changes in the direction of the construc-tion of a democratic society, a legal state and a market economy havebeen possible to date. The previous government was founded and main-tained on monopoly and the misuse of the state and executive apparatusand on the administrative regulation of relations in all essential sectorsof the economy. In the spheres of the political and legal system, therewas increasingly less latitude for the realization of basic civil freedomsand rights as guaranteed by the Constitution; the independence of the ju-diciary was virtually abolished; parliament was marginalized and, thus,the constitutional principle of the division of power was completely de-graded. That is why the institutional and legal adjustment of the eco-nomic and legal system of Serbia and FRY to European standardsrequires fundamental reforms in all domains of social life. It is therebyvital first to carry out the corresponding changes and adjustments ofconstitutional solutions, to be followed by legal and other solutions.

In the case of the Constitution of FRY, its adjustment to Europeanlegal standards depends on multiple factors and can be achieved in anumber of stages. Montenegro, on account of the fact that its legallyelected deputies have been prevented from participating in the work ofthe Chamber of Republics of the Federal Assembly, has not recognizedthe decisions of the federal bodies since mid 1998 and is forming a sepa-rate economic and legal system on the lines of European Union stan-dards. The Montenegrin state leadership established in August 1999 aplatform for the basic redefinition of relations between Montenegro and

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Serbia, which Serbia has not even examined officially. Therefore, thefirst political step, after the victory of democratic forces in Serbia, is theadjustment of the stands of the state leaderships of Serbia andMontenegro on the nature of the future common state and on the contentand the extent of its functions. A referendum would then be preparedand held in which the citizens of Serbia and Montenegro would be askedto vote on whether they wish to live in a common state. This would thenrequire the formal adoption of a constitutional document of the newstate community of Serbia and Montenegro, which would, in the sphereof the relations between the two federal units, be based on their fullequality.

Constitutional changes imply strict adjustment to European Un-ion standards of constitutional and legal solutions in the domain of hu-man freedoms and rights, the institution of the rule of law, ademocratically elected parliament and accountable government, inde-pendent judiciary, free media and guarantees for free and fair elections,as well as the establishment of a market economy system. It is also nec-essary to adjust the constitutions of Serbia and Montenegro with that oftheir future state community and start to pass federal laws and other reg-ulations on the basis of a new federal constitution.

In order for a new social, economic and legal system to be set upin a short space of time after the victory of the democratic opposition inSerbia, preparations for the future constitutional-legal system and fun-damental laws, which would be in line with European standards, havealready started. It should thereby be borne in mind that regular parlia-mentary elections in Serbia, originally scheduled to be held in the courseof 2001, will be held in December 2000 as early republican elections.

With respect to basic institutional changes in the domain of theconstitutional-political system, a classic parliamentary system should

first be introduced in Serbia, where there exists at present a presidential-parliamentary system of power. This also implies the completion of con-stitutional mechanisms and guarantees for the strict respect of the sys-tem of the division of power into legislative, executive and judiciary,such as exists in countries with developed parliamentary systems. The

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future parliament should have at its disposal effective constitutional in-struments for the political control of the government, as well as of theactivities of the secret police. The Constitution should define in detailthe situations and procedures in which the government may dissolveparliament. The possibility should thereby be excluded of the govern-ment being able to do so in the case of parliament launching a motion ofa vote of no confidence in the government (as provided for in the Consti-tution of Serbia).

The introduction of a parliamentary system of government auto-matically implies a change in the present constitutional solutions on themethod of election of the President of FRY and the presidents of the re-publics – federal units. Instead of the present direct election by citizens,they should be elected and dismissed by parliaments (and, if they haveviolated the Constitution, with the prior assessment of the ConstitutionalCourt).

In the case of the redefinition of the constitutional position of the

courts (regular and constitutional), major changes are also essential thatshould totally guarantee the independence and autonomy of the courtsand the judges as the guardians of constitutionality, legitimacy and civilfreedoms and rights. These changes refer primarily to the method of theelection of judges. Instead of the present system of their election by par-liament, where political and party criteria prevail, there should be the in-troduction of a separate institution – a higher judiciary council. Themajority of its members should comprise judges from the highest courts,while the other part would comprise prominent legal experts. The Con-stitution should guarantee a stable material position for courts, whichwould not depend on the will of the executive authorities. This would bemade possible by the introduction of a separate judiciary budget, as partof the state budget.

An ombudsman (public legal officer for citizens) should be intro-duced into the new constitutional system, as an independent parliamen-tary institution for protecting citizens’ constitutional freedoms andrights, primarily from the incorrect and irresponsible work of adminis-trative bodies, particularly the police.

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The greatest attention should be paid in the future constitution ofthe common state, and in the constitutions of Serbia and Montenegro, tothe definition and guarantees of civil freedoms and rights in line with in-

ternational legal standards in force.34 Their quite concrete constitutionaldefinition is needed, and this means a clear definition of the cases inwhich certain civil freedoms and rights may in exceptional circum-stances be limited in order to protect the equal rights of others or to pro-tect general social interests, in line with valid international legalstandards. That would make it possible to avoid such a situation as thepresent one in FRY and Serbia where civil freedoms and rights, whichare not sufficiently concretely defined, and the same is the case concern-ing the conditions and extent of their limitation – are interpreted arbi-trarily and grossly violated by bodies of executive-administrative autho-rity (particularly the police), and more and more frequently by thecourts. A constitutional complaint should also be built into the futureconstitutional system (as is the case in Germany and Switzerland),through which citizens could protect their basic civil freedoms andrights before a constitutional court.

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34 Conventions on respect for basic human rights accepted by countries that are candi-dates for membership in the EU:- European Convention on Human Rights - Protocol No. 1 (right of ownership, etc.),

Protocol No. 4 (freedom of movement, etc.), Protocol No. 6 (death penalty), Proto-col No. 7 (ne bis in idem)

- European Convention on the Prevention of Torture

- European Social Charter - Revised European Social Charter, Supplementary Pro-tocol for ESC (collective complaint system)

- Frame Convention for National Minorities

- International Covenant on Civil and Political Rights (ICCPR) - Optional Protocolto ICCPR (right to personal communication), Second Option Protocol to ICCPR(abolition of the death penalty)

- International Covenant on Economic, Social and Cultural Rights

- Convention against Torture

- Convention on the Elimination of All Forms of Racial Discrimination

- Convention on the Elimination of All Forms of Discrimination Against Women

- Convention on the Rights of the Child

6.2. Changes in systemic laws

Parallel to the preparation of new constitutional solutions, spe-cialized expert teams should work expeditiously on the preparation ofnew systemic and other laws to lend concrete form to the new constitu-tional principles, which would at the same time also be adjusted to thelegal standards of the European Union. These are, first and foremost,laws that define the manner of the realization of fundamental civil free-doms and rights, the organization of the state administration and localautonomy, an independent judiciary and an ombudsman. There wouldthen be a series of systemic laws in the sphere of the economic systemand market economy, as well as laws that would in a new way regulatethe spheres of education (primary, secondary and university), culture,science, health and social insurance and social protection.

In the case of fundamental civil freedoms and rights, priority le-gal projects are in the domain of electoral rights and public information.The existing laws in these domains should be annulled and new lawsprepared in line with European legal standards. Separate laws shouldregulate the manner of the realization and protection of the freedom ofpeaceful civil gathering, public expression of opinion and criticism ofstate bodies and public officials. Then, the inviolability of the domicile(home), private correspondence and personal data should be guaranteed.

It is of urgent importance to pass laws regulating the procedure ofcitizens’ realization of their rights and responsibilities before the courtsand administrative bodies. This refers primarily to the Law on Criminal

Procedure, in which the establishment of criminal responsibility shouldbe totally adjusted to European legal standards. It would first be neces-sary to abolish today’s huge police authority in the pre-criminal proce-dure, i.e. abolish the possibility of police detention, without the right to adefence lawyer, for a duration of 72 hours, whereby people’s lives, free-dom, mental and physical integrity and human dignity are jeopardized.

Considerable changes are also essential in the Criminal Law (fed-eral and republican) in line with European legal standards. Particular at-tention should be paid to the abolition of all generalized “rubber”

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criminal provisions that make it possible to introduce political criminalacts on the basis of the so-called verbal delict.

It is also of immediate importance to pass other procedural laws

(on civil procedure, administrative dispute and administrative proce-

dure. This refers particularly to the Law on Offences, as duties havebeen entrusted to bodies dealing in offences (administrative bodies ap-pointed for a period of four years by the Government of Serbia) that can,according to the Constitution, only be performed by regular courts. Thisalso refers to the jurisdictions of the state administration bodies. It isnecessary to prepare a new law on executive procedure given the verylengthy, complicated and inefficient procedure of passing final adminis-trative acts and valid and executive court decisions. This is one of thegreatest problems in the realization of fundamental civil freedoms andrights.

The Law on State Administration should organize administrativework and jurisdiction in a new way, and it should make its attitude to-wards citizens and other legal subjects more responsible, simpler andmore effective. This law should define a quite concrete political controlsystem by parliament over the work of the state administration, as wellas rendering the control of the legality of administrative acts by courtsmore effective.

A new Law on the Police should ensure fundamental reforms ofthe police’s role in the system of executive and administrative authority,its jurisdictions and its manner of implementing them, particularly withrespect to citizens, that is their fundamental civil freedoms and rights.Particular attention should be devoted to defining a suitable system ofthe political control and police accountability before parliament, espe-cially in the case of the activities of the secret police, of major illegali-ties, that is the violation of fundamental civil freedoms and rights and ofthe political misuse of the police in conflicts with political opponents,which was a large-scale practice of Slobodan Miloševiæ’s regime.

The Law on Defence and the Army should also undergo majorchanges with respect to the clear definition of the army’s basic role inthe defence of the independence and territorial integrity of the state, the

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method of command, the professionalization and total de-politization ofthe army, subjects which are of marked importance in FRY today.

The Law on Courts should regulate in a new manner their juris-diction, organization, the methods of the appointment and dismissal ofjudges and the material position of courts and judges, with the aim ofachieving independence and autonomy, particularly with regard to theexecutive authority and the ruling party echelons. Changes should alsobe made to the laws on constitutional courts, beginning with their juris-diction, the method of the appointment and dismissal of judges, proce-dure and the legal impact of these courts’ decisions, their materialposition, etc. The constitutional complaint for the protection of funda-mental civil freedoms and rights should be put under the jurisdiction ofthese courts, as is the case in Germany.

The rule and obligation that courts and judges must to act in linewith the provisions of ratified international agreements and in line withgenerally valid international legal standards, if the legal provisions arenot adjusted to them, should be introduced into the Constitution and thelaws on courts.

Furthermore, the Law on Public Prosecution should regulate theprosecuting authorities and their jurisdiction in a new and more com-plete manner with the aim of their achieving complete independence inthe achievement of their constitutional and legal rights, powers and obli-gations in line with accepted international legal standards. The methodof the election and dismissal of prosecutors should be regulated in a sim-ilar manner to that of judges.

Through the Constitution and the corresponding laws, thereshould be the significant decentralization of the now markedly central-

ized and bureaucratized state authorities in Serbia. This presupposesthat, first through the Constitution of Serbia and then through the law, acorresponding system of decentralization should be established throughthe introduction of regions (on the lines of experience in Spain and It-aly), to which part of the present functions of the republican state bodieswould be transferred. This would be an added incitement to democrati-zation, i.e. it would make possible the direct participation of citizens in

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the execution and control of public matters. If regions are not intro-duced, future constitutional solutions should guarantee a higher degreeof autonomy to the present provinces in Serbia, on the lines of similarforms of decentralization in Europe.

The new Constitution of Serbia and the Law on Local Autonomy,in line with the European Charter on Local Autonomy and with Serbia’stradition in that domain, should define in a new way the position and ju-risdictions of units of local autonomy and their position in relationshipto state bodies. It is thereby essential that the authentic, constitutionallyand legally established functions of local autonomy, including their fi-nancing, should be precisely separated from state authority and for themto be performed on an autonomous basis by local bodies. State bodieswould only have the function of supervision over the constitutionalityand legality of the work of local bodies.

The domains of education, culture, science, health and pension

insurance should also be the subject of major institutional, legal andother changes.

A contemporary society and market economy require a modernsystem of education that will be a powerful factor in accelerated eco-nomic, technical, cultural and overall social development. Curricula(from the primary school to the university) must be free from ideologi-cal content, and must also be compatible with international professionaland other standards. This requires the annulment of existing laws andthe passing of new ones to cover the entire education system.

In the sphere of culture, it is essential to change many conserva-tive and ideological value systems and categories and to adjust to agreater extent to contemporary cultural trends in Europe and the devel-oped world.

Major institutional and legal adjustment will also be necessary inthe sphere of the organization and financing of the health system, health

insurance and pension insurance. In this sense, reforms are needed toachieve a radical rationalization and modernization in these spheres.Maximum use should thereby be made of the experience of EuropeanUnion countries, while maintaining those solutions to date that are the

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expression of the traditionally developed social function of the state, andare also in line with economic possibilities.

One of the essential preconditions for the successful reform of theYugoslav society and economy is the comparative preparation and real-ization of an entire system of professional education and the training ofexisting and new personnel for the establishment and promotion of anew social-economic system, for the use of new know-how and technol-ogies, modern informatics systems, etc. Education programmes will beessential in all segments of society – ranging from the economy (modernmanagement), state administration, local autonomy and courts, up to themedia. These programmes should be conceived as a system of the per-manent education of experts in line with the latest knowledge and tech-nologies in the developed world, and they should be realized incooperation with prominent experts of the European Union.

6.3. Adjustment of economic legislation to the rulesof the European Union

The overall economic system, ranging from a redefinition ofownership relations to the establishment of modern market institutions,should be regulated in a new way, in accordance with European Unionstandards. To this end, Serbia has virtually taken no measures of real im-portance to date. On the contrary, a regression has occurred as comparedwith the state of affairs ten years ago, particularly prior to the introduc-tion of international economic sanctions in 1992. Instead of the previouscomprehensive administrative and regulative role of the state in theeconomy, in the future economic and legal system it should only estab-lish and define the basic institutional and legal framework (the “rules ofthe game”) for a market economy, guarantee respect for ownership andcontractual obligations, give a market impetus to economic subjects andliberalize the financial and foreign trade system with its measures, espe-cially through taxes and other macroeconomic instruments.

The first step in the construction of the institutions and the legalcontrols of a modern market economy is the realization of privatization,

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the main objective of which is to increase the effectiveness of compa-nies, consolidate market competitiveness and prevent monopolies. Aneconomic reform programme also requires a corresponding liberaliza-tion system, first and foremost of the sphere of foreign trade and the fi-nance system.

One of the most important institutional and legal changes shouldbe effected with respect to the legal and economic status of companies.They should undergo thorough reform as to ownership structure andmodernization of organization and management, in order for them to beable to compete in the market economy.

The new market system of business activities requires the corre-sponding legal reform aimed at the reaffirmation of the long totally de-graded contract, that is the full contractual responsibility of economicsubjects for the obligations they have undertaken.

Market reforms require deep-seated institutional and legalchanges in the sphere of the finance and banking system and the intro-duction of financial discipline.

The monetary, foreign currency, customs and foreign trade sys-

tems should also undergo deep-seated changes and be adjusted to Euro-pean standards. The present administrative system of foreign tradepermits, which is one of the main sources of corruption, must be abol-ished as soon as possible. The tax system should also be reformed withthe aim of its being geared to the efficient and rational collection of stateincomes.

The market economy model demands major changes in thesphere of the social policy of the society. What is required here is thatcompanies be freed of their social functions and the system of socialwelfare for all be abandoned; instead of this, social welfare would bechannelled towards those who are not able to earn an income to ensurebasic existential requirements.

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6.4. Measures for institutional adjustment to EUregulations

Besides changes in the basic constitutional-legal and other sys-temic laws in the sense of their adjustment to the requirements of Ser-bia’s more rapid integration in fundamental European trends, the newdemocratic authorities in FRY-Serbia will be faced with the enormoustask of the gradual harmonization of domestic regulations to EU regula-tions, with the ultimate goal of adopting the “legal achievements of theCommunity” (acquis communautaire), as a condition for membership inthe Union. The extent of this task is shown by the fact that candidates forfull members in the EU have to integrate some 40,000 legal acts of theEuropean Union into their legal systems. This is, of course, a processthat lasts for several years, and preparations for it have to beginpromptly. It must here be pointed out that the technical adjustment ofregulations will not yield the desired results unless there is the corre-sponding political determination, as well as the consensus in society (thepolitical environment) for the accomplishment of those goals.

Activities of the federal or Serbian authorities to date with the aimof the harmonization of legal regulations have been more than modest35,although this does not mean that certain FRY (Serbian) regulations arenot, in certain sectors, in line with broader European and world trends.This is, however, rather the consequence of the professional knowledgeand interests of the persons submitting the laws and other regulations onan expert level than the result of clear political commitment. Thus, forexample, certain segments of the legislation on companies, on industrial

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35 While Radoje Kontiæ was prime minister, in March 1998, the federal governmentformed a commission for the harmonization of the legal system of FRY to the rules ofthe EU, the Council of Europe and the WTO which, besides some partially realizedattempts to train the administration, did not show signs of great activity. In addition,that same government also adopted the conclusion that all proposals of federal regu-lations must also have the accompanying explanation as to the degree of their adjust-ment to EU regulations.

and intellectual property and regulations in the domain of ecology orstandardization are to a certain extent in line with European rules.

The adjustment of FRY regulations with EU rules is an excep-tionally complex process, which should be performed in several stagesand on several levels. It is not a question of the adoption and adjustmentof regulations, which is in itself a huge task; it is necessary at the sametime to prepare the corresponding economic, institutional, administra-tive and legal conditions that will ensure the application and respect ofthe regulations, as well as the provision of the corresponding informa-tion to all those (firstly companies, citizens, administrations, etc.) thatare obliged to respect and carry out the regulations. This process presup-poses that adequate financial and human resources will be secured, aswell as the existence of a sufficiently developed and dynamic economythat is able to meet the costs of respecting a legislation, that in many seg-ments also requires additional and separate investments (e.g. a higherlevel in the sphere of standardization, respect for the rights and protec-tion of consumers, ecological regulations, etc.).

6.5. Stages in the adoption of “legal achievements ofthe European Union”

6.5.1. Urgent measures

The activities that should be undertaken in order to ensure adjust-ment of regulations, conditionally it could be divide into the preparatoryphase, short-term measures (the first year) and medium-term measures(two to three years).

Bearing in mind the present level of (non-)existence of relationsbetween the EU and FRY (Serbia), priority activities in the preparatoryphase should deal with those issues and regulations that are directly

linked to the fulfillment of the basic conditions for cooperation with the

EU and the establishment of a bilateral agreement on stabilization and

association between the EU and FRY. The EU adopted its basic criteriafor the improvement of relations with SEE in the EU Council

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conclusions of 27 April 199736. These conditions are further confirmedand given greater detail in the new EU initiative on the process of stabili-zation and association of SEE countries37. The EU has in the meantimealready started negotiations on the conclusion of agreements on stabili-zation and association with Macedonia and Croatia.

It is evident that the basic precondition for starting this process inFRY (Serbia) is of a political nature, that is the democratic transition ofpower, as well as the correction and adoption of fundamental legal acts

that refer to the process of democratization and reforms, such as basictexts on respect for human rights, minority rights, the democratizationof the media, full respect for the country’s international commitments,including the Dayton Accords, as well as other issues of a political na-ture38. In the domain of economic reforms, it is necessary for the newGovernment to adopt a strategy for the transition of the economy andalso foresee and prepare a packet of laws necessary to put the country onthe path of a market economy and transition, which, among other things,would include laws on the state budget, on companies, privatization,regulations concerning accountancy, taxes39, on bank transactions, reg-ulations against corruption, etc. These measures, which are urgent,should enable a new democratic Government, in principle, to open up

the door to cooperation with the EU, which would for its part make pos-sible not only financial EU support but also institutional and technicalsupport to the further adjustment process, that is the harmonization of

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36 Involved here is a series of general criteria that refer to democratic principles, respectof human rights and the rule of law, respect of the rights of minorities and to eco-nomic reforms on market foundations, alongside specific criteria for certain coun-tries (respect of the Dayton and Erdut agreements, etc.).

37 Commission Communication to the Council.., op.cit.38 Which, for example, also includes the issue of cooperation with the International

Criminal Tribunal in The Hague.39 FRY, for example, has still not implemented a tax system that is in line with Europe

(i.e. Value Added Tax /VAT/ as the basis of tax policy), whereby it also lags consid-erably behind its neighbouring countries. A federal law on VAT is to be prepared asfrom 2001.

regulations and the integration of FRY (Serbia) and its economy in Eu-ropean trends.

6.5.2. Short-term priorities

In the short-term period that would encompass the first year of theGovernment of democratic FRY (Serbia), it is necessary to adopt a sys-

temic programme for adjustment to the European Union that wouldhave institutional-organizational, legal-technical and educational-informative aspects.

On the institutional-organizational level, it is necessary for thenew authorities, on the lines of other Central European and Eastern Eu-ropean countries, to adjust the structure of the Government and otherbodies to the basic strategic objective – integration with the EU. Thesemeasures presuppose the foundation of a separate ministry, as well as a

governmental coordinating body for integration with the EU. That bodyshould be headed by a high-ranking political figure, such as the primeminister. As well as on the political level, it is also necessary to formworking bodies on a technical level (for example a commission forinter-departmental cooperation), and administrative working groups forindividual spheres. Within this framework, it is highly important for theGovernment also to set up a separate legal department (within a ministryof legislature or separately) that would have the exclusive duty of ensur-ing that the proposals for the new regulations are in line with EU regula-tions (which would also be the duty of all those ministries submitting theproposals). Finally, broader expert and economic circles should also beincluded in the adjustment-harmonization process by means of separateadvisory bodies for legal issues (advisory commissions) attached to theGovernment, or attached to economic associations (in the case of theeconomy).

A system organized in such a way will facilitate both the negotia-tion process on the agreement on stabilization and association and fur-ther activities towards cooperation with the EU. After forming a“Council for Association” between the EU and FRY (Serbia and

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Montenegro), this Council will monitor the corresponding preparationswithin FRY. Lower Council bodies and working groups will have corre-sponding “partners” on the level of institutions for cooperation betweenthe EU and FRY.

On the level of legal-technical organization, it is necessary for atleast two basic documents to be prepared in a short period. On the onehand, it is vital to adopt a Strategy of Integration, which would encom-pass all political, economic and legal objectives of FRY’s short-termand long-term cooperation with the EU. The strategy would further bedefined in more detail by means of an action plan. It is also vital to pre-pare as soon as possible a picture of the existing state of affairs of the le-

gal system in all domains of necessary harmonization.40 It will be clearon the basis of this “picture” to what extent and in what domains FRYrules correspond more or less to EU regulations. It will then serve for thedefining of short-term priorities on the political level in the scope of theaction plan with a view to the further harmonization in individual do-mains41.

Amongst the short-term priorities, besides the above-mentioned(taxes, economic legislation, accountancy), there should doubtless alsobe the inclusion of customs and foreign trade regulations as well as otherregulations dealing with the sphere of the “internal market” (standard-ization and certificates, the right to competition), as well as industrialand intellectual property. In principle, from the 23 domains foreseen foradjustment to the internal market of the European Union, priority should

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40 Adjustment to the EU internal market encompasses 23 domains: free movement ofcapital, free movement of industrial products, competitiveness, social policy, agri-culture, transport, audio-visual services, the environment, telecommunications,taxes, free movement of commodities in sectors agreed upon, public acquisitions, fi-nancial services, protection of personal data, companies’ rights, accountancy, civilrights, mutual recognition of qualifications, industrial property, power supply, cus-toms union, indirect taxation, consumer protection.

41 This methodology corresponds to the process of cooperation between the EU andcountries that are candidates for EU membership in the scope of the so-called part-nership for membership.

go to those rules that will enable business transactions under marketconditions and favour the possibility of attracting foreign capital.

Within the scope of education-informative activities, it is essen-tial to take measures as soon as possible that will raise the level ofknowledge of and acquaintance with EU rights and regulations, particu-larly in state and local administration circles and in the economy, and, inthe long-term, amongst the judiciary. Serbia’s ten years of isolation,while highly dynamic changes have been taking place in Europe, has leftconsequences although, in comparison with neighbouring countries,Serbia does not lag greatly behind in the number of experts. The follow-ing programmes should be prepared with the objective of teaching andeducation:

• a programme of training and education on EU law intended forthe administration (state, regional, local);

• the introduction of European law as a compulsory subject atfaculties of law and social sciences in FRY; the introduction ofpost-graduate studies in European law; a programme for pro-viding scholarships for students of European law at home andabroad; curricula for lecturers;

• a programme of education in European law for judiciary bodies;• a training and informative programme for businessmen.

6.5.3. Medium-term activity

On the medium-term, it is necessary to continue adjusting regula-tions in FRY with EU regulations, in line with the agreed priorities ac-cording to the agreement on stabilization and association to be adjustedwith EU representatives. The fundamental objective of these activitiesshould be the establishment of basic political and economic criteria aswell as other regulations with the aim of setting underway negotiationsfor the membership of FRY (Serbia) in the EU. Thereby, alongside theregulations dealing with the internal market and the economic sphere(public acquisition, intellectual property rights, protection of data, freemovement of commodities, free movement of persons, freedom of

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services, competitiveness, telecommunications, taxes, consumer pro-tection, customs, agriculture, fisheries, power supply, transport, socialissues, economic and social cohesion, the environment), it will also benecessary to step up activities in the spheres of the “administration ofjustice and internal affairs”, as well as adjustment to the EU “commonforeign and security policy”. The consolidation of administrative and ju-diciary potentials (training of judges, professional administration, etc.)will continue. The methodology of harmonization will follow themethod used by the EU Commission in the scope of negotiations for en-try into membership of the EU (adoption of “achievements of the Com-munity”42, the domain of screening, etc.).

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42 Adjustment to the Union Achievements (acquis communautaire) – 31 domains: freemovement of commodities, free movement of persons, free provision of services,free circulation of capital, companies’ rights, right of competitiveness, agriculture,fisheries, transport, taxes, EMU, statistics, social policy and employment, powersupply, industrial policy, small and medium-scale companies, science and technol-ogy, education and training, telecommunications, cultural and audiovisual policy, re-gional policy, the environment, healthcare, administration of justice and internalaffairs, customs union, external relations, foreign affairs and security, budget, finan-cial control.

7. DEMOCRATIZATION, THE CIVIL SOCIETYAND EDUCATION

7.1. Democratization

The break-up of the regime of self-management socialism in Ser-bia in 1989-1990 was not preceded by lengthy civil disobedience cam-paigns or other protests to force concessions from the government. Thatis why we can speak of “changes from the top” in Serbia and in the otherfive republics of the former SFRY. The ruling Communist Party, theLeague of Communists of Serbia (LCS), decided to recognize the rightto opposition organization and activity at the end of 1989, when the re-public was part of SFRY. Having accepting multi-partism, the rulingSocialist Party of Serbia (SPS), after long hesitation, scheduled the firstmulti-party elections for December 1990, such elections having previ-ously been held in all the other Yugoslav republics. Serbia’s single-party parliament, which was elected in 1989, adopted a new SerbianConstitution on 28 September 1990, that is before multi-party elections,while, in the other Yugoslav republics, new constitutions were adoptedby multi-party parliaments after elections.

The Constitution of Serbia, which was tailored to a great extent tosuit the regime’s most powerful figure, Slobodan Miloševiæ, gave therepublican president wide powers. The president is elected by direct bal-lot and has the right to deferral veto of laws, to decide on the existence ofa threat of war, to proclaim a state of emergency and to dissolve parlia-ment. Bearing all this in mind, it can be said that Serbia has a semi-presidential system. As to the structure of parliament, the Constitutionof Serbia provides for a single-chamber parliament, thus following thelogic of concentration of legislative authority. A single-chamber systemin Serbia, where ethnic minorities account for one third of the popula-tion, means that the ethnic minorities do not have such adequate political

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representation as would be ensured by a two-chamber or multi-chamberparliament. The Serbian Constitution concentrated all functions on therepublican level, thus, practically speaking, abolishing the autonomy ofthe two provinces, Vojvodina and Kosovo, which they had gained underthe SFRY Constitution of 1974. For that reason, the parties in Kosovorepresenting the Albanian national minority (which accounts for 17.2%of the republic’s population) refused to take part in the first (and alllater) elections and decided to boycott all official political institutionson a permanent basis.

Besides the Constitution, Serbia’s single-party parliamentadopted in 1990, without any consultation with the opposition, an elec-toral law founded on the majority principle in two rounds. At the elec-tions in 1990, the ruling SPS, with only 46.1% of the votes, gained77.6% of the seats in the People’s Assembly of Serbia. That result wasachieved thanks, among other things, to SPS’s crucial advantages overthe opposition parties as concerns official media coverage. At all thelater republican elections (1992, 1993, 1997), the ruling SPS, withoutthe consent of the opposition, altered the election rules (mainly the elec-tion law and the law on constituencies), and frequently had recourse tomass irregularities (particularly at the local elections in 1996 and thepresidential elections in December 1997), with the help of which it suc-ceeded in remaining in power, either independently or in coalition.

As no single election for the Serbian republican parliament can be

described as having been free and fair, the political order in that repub-

lic, unlike that of the majority of post-Communist South Eastern Euro-

pean countries, was not democratic but authoritarian. The order in

Serbia most resembles a “pseudo-democracy” in which certain institu-

tions from the democratic arsenal are present, but the functioning of

those institutions was essentially limited by the real centres of power in

society. In that type of order there exists a form of democratic constitu-

tion, which is not, however, respected; opposition parties exist, but they

are institutionally and in fact inferior to the ruling party; elections are

held, but not on an equal footing. The political order in Serbia so de-

scribed is out of step not only with those of neighbouring states but also

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with that of the other constituent republic, Montenegro, which under-

went a deep-seated democratic transformation in the middle of 1998.

Since 1992, those two republics have made up the Federal Republic of

Yugoslavia (FRY)43.

The authoritarian order in Serbia was seriously undermined at the

elections held on 24 September 2000. Those elections were for the Pres-

ident of FRY, the Chamber of Citizens and the Chamber of the Repub-

lics of the Federal Assembly, the provincial assembly of Vojvodina and

local (municipal and town) assemblies. Slobodan Miloševi�, the most

powerful figure of the ruling regime and its personification, was soundly

defeated in the first round of the presidential elections by the candidate

of the Democratic Opposition of Serbia (DOS), Vojislav Koštunica. The

DOS candidate also won massive victories at federal, provincial and lo-

cal levels. The regime’s attempts to quash Vojislav Koštunica’s victory

provoked mass protests that culminated on 5 October 2000. Faced with a

wave of mass protest, the ruling regime recognized the election results,

after which it quickly lost control of the repression machinery (army,

police) and, under pressure from the democratic opposition, scheduled

extraordinary republican elections for 24 December 2000. Bearing in

mind that DOS gained a convincing victory at the September elections,

despite extremely unfavourable conditions, it can be assumed with a

high degree of certainty that this success will be repeated at the Decem-

ber elections for the People’s Assembly of Serbia. We can then expect

the profound democratic transformation of Serbia, which presupposes

major changes in the republican Constitution and many systemic laws.

Democratic transformation will certainly encompass several do-mains. It will presuppose, amongst other things, the strengthening of therole of parliament, which, under the present Constitution and even morein practice, is in the shadow of the republican president. The second, and

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43 FRY was established by the Constitution of 27 April 1992, which was promulgatedby only 74 of the total 220 members of the Federal Council of SFRY, which ceased toexist in 1991. FRY was established by agreement between the ruling parties of thetwo republics, the Socialist Party of Serbia and the Democratic Party of Socialists,without any consultation with the opposition.

no less important domain is the adjustment of normative solutions con-cerning human and civil rights to European standards, as well as the es-tablishment of institutions and procedures that will ensure that theserights are achieved. This is also true of the collective rights of the mem-bers of ethnic groups. The third domain is the enlargement of decentrali-zation, especially concerning the true autonomy of the provinces and thestrengthening of local self-government. Finally, the fourth domain con-cerns relations with Montenegro, in the sphere of which Serbia, particu-larly since the deterioration of relations between the two republics in1998, has grossly violated the principle of the constitutional equality ofthe two republics, to the detriment of Montenegro. New relations be-tween the two republics can only be established in a democratic dia-logue, with mutual consent. The possibility of the reintegration of theprovince of Kosovo, which, according to UN Security Council Resolu-tion No. 1244, has actually been under UN protectorate since June 1999,will essentially depend on the results of the democratization of Serbiaand on the achievement of a mutually acceptable arrangement withMontenegro on the future political community.

7.2. Civil society

7.2.1. The role of the third sector

Despite the highly unfavourable political climate, the civil soci-ety developed extremely dynamically in the 1990’s. There are around25,000 non-governmental organizations in Yugoslavia today. It is as-sessed that out of this total there are at least 1,500 new, independentNGOs dealing with the deep social crisis, promoting social activism andsocial change, initiating new social subjects, mobilizing various targetgroups and offering many new services. The first ecological organiza-tions appeared at the end of the 1980’s, to be followed in the first half ofthe 1990’s by a sudden increase in the number of anti-war, humani-tarian, feminist and human rights organizations. Then came a wave ofalternative educational, research and cultural associations and

83

organizations. The problem of the rule of law became the common de-nominator of all independent NGO networks. That sector directly con-tributed to the development of new ideas and a new system of values, adifferent articulation of the interests of citizens and social groups and al-ternative critical thought. NGOs have become a new social, political andcultural reality in Yugoslavia.

After the civil protests during the winter of 1996/1997, NGOs ex-panded and became major factors in the promotion of democracy andthe development of the civil society. The support from new local autho-rities and the formation of coalition and partnership between the twosectors on the local level have played a major role in strengthening thecivil society. New types of citizens’ association and new NGO networksappeared after the Kosovo war and NATO’s air strikes (March-June1999): civil parliaments and civil resistance movements, new profes-sional associations of journalists, university professors, judges and tradeunion branches all over Serbia. Such developments could be describedas an explosion of the third sector, which heralded the forthcoming po-litical changes. The non-profit sector is doubtlessly already playing asignificant role in the construction of new institutions, the control of so-cial processes and the creation of a new political climate in the country.

The third sector has also played a major para-diplomatic role andmanaged to overcome the country’s isolation at a time when politicaland economic isolation were at their most intensive. Certain groups ofsignificant factors on the domestic scene became included in regionaland European processes of cooperation and integration. The SzegedProcess for “free towns and municipalities of Serbia”, the Timisoara Ini-tiative for free media, the Graz Process, which includes alternative edu-cational structures, the Royaumont Process that includes non-governmental organizations in the region, media and trainingprogrammes, non-standard humanitarian assistance (energy for democ-racy, asphalt for democracy, schools for democracy) and the networkingof independent institutes and research centres from the region(SEEPIN), etc.

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7.2.2. Problems and limitations

What are the main problems44 facing the non-profit sector today?

1. the reluctant, repressive attitude of the previous authorities,2. an unfavourable legal status and the need for new laws to regu-

late the establishment and functioning of non-profit organiza-

tions,

3. the shortage of trained personnel, that is staff that know their

objectives and tasks, are competent organizers and managers,

know how to collect resources and generate publicity, are up

to date with networking, etc.,

4. inadequate physical and organizational infrastructure,

5. unstable and inadequate financing.

The third sector in Serbia is at a crucial point that is vital for itsfurther development. It has assumed an important position on the politi-cal scene and it has to maintain and improve that position. Interest in itsdevelopment will doubtless rise with the country’s democratization andopenness to the world. It will not be long before we have a generally fa-vourable social climate, a change in relations between the state and localauthorities, a stronger economy, and greater opportunities for individu-als to contribute to the development of the non-profit sector with dona-tions, and professional and voluntary work. In the first phase, however,international foundations and their support will play a crucial role. TheStability Pact for South Eastern Europe, the Stabilization and Associa-tion Process for the Countries of South Eastern Europe and the majorityof regional initiatives in the Balkans point to increased reliance on thenon-profit sector in the region’s reconstruction and development and itsdemocratization and stabilization.

In the immediate future, assistance to the non-profit sector shouldbe channelled in three directions:

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44 Basic Facts about the Non-Profit Sector in the FRY, Forum of Yugoslav Non-

Governmental Organizations, Belgrade, 2000, p.7.

1. According to purpose, there must be the intensification of as-

sistance for humanitarian and ecological projects, as well as

projects for promoting the process of democratization (elec-

tion control, elaboration of draft laws, schools for democracy

and the civil society, the development of local communities).

Assistance should also be channelled towards projects to in-

crease the media visibility of the non-profit sector (by advanc-

ing forms of media communication), projects linked to the

promotion of entrepreneurship and the training and organiza-

tion of entrepreneurs, particular projects targeting young peo-

ple, women, the village and culture, and projects linked to

preparations for and the promotion of relations with the EU

and related public activity and campaigns. Of particularly

great long-term importance are the control of the transition

process, the achievement of sustainable local development,

and preparations for European integration.

2. Infrastructure is one of the weakest points of the non-profit

sector, both physical, organizational and from the aspects of

information and coordination.

3. It is essential to provide education and training for work in the

non-profit sector on account of the long tradition of social pas-

siveness and the closed nature of society, particularly in the

last ten years. There is an evident lack of experience and

knowledge in this sector (writing projects, strategic planning,

management, provision of resources), both among volunteers

and among professionals.

Regarded on the whole, the non-profit sector needs to share Euro-pean and regional experience as concerns:

1. relations with political parties;

2. relations with other civil society representatives (the media,

trade unions, educational institutions, the Church, citizens);

3. relations with local authorities;

86

4. the formation of coalitions with various partners (the media,

trade unions, business circles, local authorities, political par-

ties).

7.2.3. The regional framework and support of theEuropean Union

For the development of a civil society in FRY, it is encouraging to

emphasize that the effective implementation of the Stability Pact for

South Eastern Europe depends to a great extent on the development and

consolidation of administrative and institutional capacities in the region

and the advancement of the civil society – both on national and local lev-

els. The civil society is expected to contribute to the consolidation of

democratic structures and the achievement of long-term benefit from the

effective management of assistance programmes and the assistance’s

successful absorption in the region.45

The Stabilization and Association Process for Countries of South

Eastern Europe46, which is a new model for the European integration of

five countries of the region (Croatia, Bosnia and Herzegovina, FRY,

Macedonia and Albania), also provides, as one of its priority domains,

for assistance to democratization, the civil society and the formation of

institutions. That includes:

• contribution to the stability of political structures in those coun-

tries, which mainly means support to free and fair elections and

education of voters, the development of parliamentary practice,

legal reforms and independent media;

• maintenance of the rule of law by assisting the judiciary and the

police and, regarded on the long term, through initiatives for

civil education in schools and the affirmation of multi-cultural

values, as well as through the provision of an efficient public

87

45 Stability Pact for South Eastern Europe…, op. cit, p.14.

46 Commission Communication to the Council and European Parliament on the Stabili-

zation and Association Process…, op. cit.

administration, mainly through anti corruption programmes

and suitable training;

• consolidation of the civil society, firstly through the establish-

ment of regional networks of foundations for democracy.

The Royaumont Process47, which is closely linked to the conclu-

sion of the Dayton/Paris Accords, is also focused on the development of

culture, the civil society, independent media, education, human rights

and regional cooperation in all domains. Although it has not yielded sig-

nificant results, this initiative certainly anticipated today’s EU policy in

which these domains of development and cooperation with countries of

South Eastern Europe are given the place they deserve.

The FRY shall, in the process of the democratization and consoli-dation of the civil society, rely to a great extent on EU support and thecorresponding regional initiative.

7.3. Education

7.3.1. State of affairs

Education is one of the domains in which considerable achieve-

ments were made in Yugoslavia’s socialist period (primarily in the

construction of the education infrastructure and the raising of the popu-

lation’s level of education). But some basic objectives were not

achieved even in the domain of education (e.g. around one third of the

population has not completed primary education, which was guaranteed

under the Constitution). In the last ten years of distorted transition there

has also been the erosion of the previous period’s achievements, and

new, significant problems have been created. Every project of change

has to face the following problems.

There is no exact insight into the state of education in the country.A precise diagnosis is therefore essential as the basis for meaningfulchanges. A comprehensive evaluation of the education system is already

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47 Royaumont Declaration, 13 December 1995.

underway in cooperation with UNICEF and UNESCO. This undertak-ing should be expanded and consolidated. An informal expert group,called the Education Forum, has also been working for several monthson an evaluation of the state of affairs in secondary and university edu-cation. It is necessary for the process of the diagnosis of the state of af-fairs to be extended by including FRY in the evaluation according to theOECD programme and methodology.

Some emergency measures and many medium-term measures re-lated to the construction and restructuring of the education infrastruc-ture are essential for the revitalization of education:

a) legislative measures compatible with European legislature

(abolition of some laws, such as the Law on the University, the

passing of new laws and regulations), one comprehensive leg-

islative act on the general problems facing education, such as

ownership relations and the autonomy of educational institu-

tions, a law on the non-formal education system, such as con-

tinuous and life-long education, adult education, etc.;

b) the formation of educational institutions that do not exist at

present (a national council of education, a national body for

the accreditation of educational institutions, a national curric-

ulum centre, a national evaluation centre, a system of informa-

tion and national statistics in education adjusted to the

European system in Eurostat, UNESCO and OECD), and the

development of research institutions in the sphere of educa-

tion.

7.3.2. Definition of education policy

FRY does not have any education policy. A start must thereforebe made on the elaboration of such a policy in line with the country’seconomic, social, scientific and cultural development policy in the lightof the major political changes that have taken place. This means that ed-ucation development priorities must be defined as the available re-sources and instruments for the achievement of those priorities. Some of

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the essential preconditions of education policy would be: the reform ofeducation structures already in place (not their destruction), primary re-liance on national resources (the existing highly developed network ofeducation institutions, the sufficient number of qualified teachers, na-tional expertise), the elaboration of a strategy for the mobilization of na-tional resources (institutional, human, material, school building andfacilities) and, on a national and particularly local level (in the process ofthe formation of local democratic authorities), the provision of maxi-mum scope for international cooperation (inclusion in UNESCO,OECD and in the respective European Union and Council of Europeprogrammes, in the Stability Pact and many international and Europeanprogrammes and projects).

In the new, open international cooperation, it is vital to start fromnational priorities while relying mainly on national expert know-how inorder to avoid the destructive effect that has been felt in some transitioncountries of ill-conceived and exaggerated decentralization (instead ofthe justified deconcentration of powers of decision making) and exces-sive liberalization and privatization in the domain of education, forwhich the basic preconditions do not exist.

Of key importance in education policy will be the definition of thestatus of education as a development resource that is interdependentwith other sectors of the social structure, and not as mere expenditure, ashas been the case to date.

The level of education on the environment is particularly low inthis country, and environmental problems are therefore distant, complexand of secondary importance for many citizens. It is necessary to assistall citizens, as well as those responsible for decision-making, to form anew awareness, with the aim of weaving the needs of sustainable devel-opment into all relations and decision-making processes.

7.3.3. Some priorities

Besides the above-mentioned measures for the creation of an edu-cation infrastructure, according to insights gained to date, the following

90

should be included in short and medium-term priorities:a) An improvement in the material and financial position of edu-

cation, especially the wages of the teaching staff, in order to

activate (mobilize) that fundamental national resource in edu-

cation.

b) The rapid elaboration and functioning of a system of the fur-

ther training and in-service teacher training in order to prepare

them for new roles, tasks and modern education methods.

Some elements of such a system and some programmes are al-

ready underway (primarily in cooperation with UNICEF and

in the framework of alternative forms of education).

c) Changes in curricula; a reduction of curricula, the moderniza-

tion of the “classic” components of school curricula, the intro-

duction of innovations (new computer and visual literacy,

education programmes for the role of citizen, for democracy

and human rights, programmes for the development of the cul-

ture of peace in the spirit of UNESCO programmes, ecologi-

cal education, the European dimension of education).

d) The prompt introduction of an non-formal education system

(adult education, continuous education, professional educa-

tion). The non-formal system (particularly retraining and ad-

ditional training programmes and knowledge innovation

programmes) could quickly contribute to the mobilization of a

powerful development resource, that is an army of one million

people at the peak of their working capacities (between the

ages of 25 and 45), who already have a reasonably high level

of education (secondary or university), but whose professional

competence is outdated.

e) The development of education for all, within the global Edu-

cation for All programmes (UNESCO, UNICEF, the World

Bank, UNDP) in order to contribute to raising the general edu-

cation level of the population and particularly that of some so-

cial groups (women, the rural population, the adult

population, some ethnic groups). That is because the

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insufficient level of education of nearly 50% of the population

is a great obstacle in the way of projects for the country’s re-

construction (economic development, democratization).

7.3.4. Possible problems

Some major problems that will arise in the education reconstruc-tion process can already be perceived:

a) How to secure supplementary financing (state budget, local

sources) without which it is not possible to activate available

resources. The securing of foreign resources without any ma-

jor prior conditions as to education policy represents a particu-

lar problem.

b) A considerable discrepancy and conflict can already be per-

ceived between the country’s economic policy, which is

founded on a liberal concept, and the education policy in

which the state must still play a significant role, for only in this

way can the right to education be ensured to many social

groups in a situation where impoverishment is being felt in en-

tire regions of the country, many municipalities and families.

c) Internal political differences between the various partners im-

portant for education (political parties, the state, the Church,

expert circles) concerning problems such as: the national and

the universal in education, secular vs. non-secular education,

the elitist concept of education or high quality education for all

and education for national minorities.

d) The inertia of education institutions and resistance to change

on account of decades of absence of the autonomy of institu-

tions of education and the lethargy and apathy in the last ten

years.

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8. INTERNAL SECURITY AND PROTECTION OFMINORITY RIGHTS

8.1. Civil security

8.1.1. State of civil security

Civil security has been constantly deteriorating in Serbia since

the break-up of the former Yugoslavia. This is also shown in research

into the perception of criminality48. Citizens regard the possibility of

protecting their rights by addressing state bodies with great mistrust.

The main reason for this trend lies in lack of respect for the Con-stitution and the laws on the part of the former President of FR Yugosla-via, and then on the part of all lower bodies. By de facto annulling theprovisions of the Constitution of FR Yugoslavia on the rights of the fed-eral units, he also introduced and consolidated the sense of general inse-curity with a view to the survival of the state and the rights of a largenumber of its citizens.

A state of affairs in which the Constitution and laws are applied

only to the extent to which it suits the new class that seized political and,

to a considerable extent, also economic power, is one that suits an auto-

cratic regime. Sanctions are welcome as a pretext for overall volunta-

rism in the interpretation and implementation of laws. Such a

relationship towards the rule of law inevitably had a negative effect on

security in society. The ten-year state of war, in which the regime de

facto kept the country, combined with the large number of refugees from

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48 Official claims on the decrease in the number of criminal offences must be seen in thelight of research results according to which only one third of persons that were vic-tims of criminal offences in the period from 1991 to 1996 actually reported the of-fences to the police (and 72% of those questioned were such).

Croatia, Bosnia and Herzegovina and Kosovo, were also important fac-

tors in large-scale civil insecurity.

Contributing to this too were the large quantities of weapons of all

kinds, as well as the formation and activity of numerous private para-

police forces that are considered to be more or less under the control of

the Serbian police.

Murders are frequent occurrences in Belgrade. Many remain un-

solved, including those where the victims are prominent members of the

regime and persons closely connected to Miloševi� and his family. Eco-

nomic and financial crime has flourished. This was possible only thanks

to the accommodating attitude of the former state bodies or their in-

volvement. The line dividing crime from the authorities was very vague,

and it is the widespread opinion that, in fact, it did not exist.

Corruption encompassed all bodies of authority. According to an

analysis carried out by the Transparency International organization, in

1999, FRY was in the group of the most highly corrupt countries, hold-

ing 61st place (with the country with the greatest degree of corruption

holding 85th place).

Citizens’ lack of trust in the police, which should be one of themost important institutions guaranteeing civil security, is on a high leveland was constantly on the increase. Politicized and indoctrinated, thepolice lose their legitimacy and had a greater and greater disintegrativeeffect.

Trust in the judiciary has also decreased, although to a lesser ex-tent. This is because the regime applied harsh measures and removedfrom office anyone showing professional independence.

This also took place in the education system. The criterion of po-litical suitability was applied in the case of University teachers, as it wasin the former Yugoslavia; para-police forces regularly checked peopleentering into and moving around faculty premises (which only hap-pened in exceptional circumstances in former Yugoslavia).

It has become customary for human rights to be violated (therights to respect for dignity, ban on torture, to freedom, freedom ofmovement, freedom of the press, to peaceful gathering, criticism, fair

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trial, unbiased information from the media that are financed from publicincomes, to a democratic change in powers in authority through fairelections, etc.).

International agreements or other international instruments (suchas the Convention against Torture, the International Covenant on Civiland Political Rights, the Universal Declaration on Human Rights), towhich FR Yugoslavia is considered a party, were either not imple-mented or were violated.

It was impossible to ensure civil security in Serbia in the existingconditions when the institutions of a civil society either do not exist orare not functioning, when public morality, one of the essential compo-nents of such a society, has been constantly destroyed over a period ofsome ten years.

In order to start to establish such institutions, it was essential thatforces prepared to act to that end should take power.

8.1.2. Measures that can promote the process of inclusionin the European Union

1. The imprecision of a large number of norms, their lack of mu-tual adjustment and even their counter-constitutionality and counter-legality can be noted in many (although not in all) domains where the is-sue of civil security is resolved. However, the content of the norms is notthe greatest problem but rather their implementation and theinculpability with which they can be violated. This places the problemof control and supervision at the focus of attention. Therefore, it is ofpriority importance to review and set into motion existing mechanismsof external and internal control of the work of state bodies and to set upnew bodies to supervise their work.

2. It is vital to set up the institution of ombudsman on the lines ofsuch institutions existing in the world, to be headed by an independentpublic official who is responsible to parliament. The ombudsman wouldreceive complaints from citizens who feel they have been wronglytreated by governmental agencies or officials at any level; he would

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further carry out investigations, submit reports and suggest appropriatemeasures.

The foundation of the institution of ombudsman should be writteninto the Constitution upon its first revision.

The experiences of some countries (Slovenia, Hungary) showthat it would be justified for a separate ombudsman for the police to existwithin that institution.

Besides, a standing parliamentary body should be formed for thestate security service. Its first task would be to formulate a proposal forresolving existing secret dossiers and to ensure legality in the work ofthis department and look into citizens’ complaints concerning its activi-ties.

3. The functioning of the disciplinary control system within theMinistry of Internal Affairs of Serbia, which is otherwise very well elab-orated, should be subject to civilian supervision in order to ensure that itfunctions as such in practice too.

4. In a number of countries, the adoption of a code of police ethics

has shown itself to be a major contribution to ensuring that the police re-

spect the law and human rights. Such a text could be adopted by means

of a separate law or as a composite part of a new (or modified) Law on

Internal Affairs.

5. As the issue of joining the European Convention on Human

Rights will remain open for a certain time, the possibility should be ex-

amined of stressing with a separate statement of a democratic parlia-

ment (or government) that not one single act or regulation may be

contrary to the provisions of that Convention49.

6. The Law on Public Information should be abolished withoutdelay and replaced with a new law that would, among other things, en-sure the following: a) the implementation of the constitutional provision(Article 46 of the Constitution of Serbia) on unbiased information from

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49 This is how Sweden acted when it incorporated the European Convention on HumanRights into its national legislature in 1994. The first of Sweden’s four fundamentallaws states that no single legal act or regulation may be contrary to the undertakingsstemming from joining the Convention.

the media that are financed by the citizens; b) the strict implementationof provisions given in the present Law (e.g. Article 8, which reads: “Noone may in any way prevent public media from presenting facts andstands on public matters”). Furthermore, the possibility should be exam-ined of compensating owners who have incurred losses due to the imple-mentation of the present Law on Information.

7. The Law on the University should also be abolished withoutdelay and replaced with a law that is in line with the requirements of acivil society.

8. Legislature dealing with the public attorney’s office and the ju-diciary should be reviewed and brought into line with the principlesadopted in the Constitution and international instruments.

9. A new Law on Criminal Procedures should be adopted or theexisting one modified.

10. The death penalty should be written out of the Criminal Lawof Serbia.

11. The task of the police should be redefined in the sense of es-tablishing a balance between its various aspects (the protection of stateinstitutions and protection of law and order, on the one hand, and theprotection of citizens, their rights and freedoms, on the other hand). It isvital to establish and elaborate the principles of the de-politicization andde-ideologization of the institution of the police.

12. Police laws and regulations should be examined and adjustedto European and other international standards. Particular attentionshould be paid to the problem of discretionary rights and the monopolyto the legal use of force.

13. The curricula of police training institutions should be re-viewed and space provided in such curricula for the issue of humanrights as is fitting to its importance.

14. A special commission should examine overall police organi-zation and put forward solutions to raise its effectiveness in the fightagainst crime. Particular attention should thereby be paid to the formsand content of preventive activity, as this aspect is at present totally ne-glected.

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15. A certain decentralization of the police system should be

launched, bearing in mind the advantages and disadvantages of both a

centralized and a decentralized system. It would probably be appropri-

ate and rational to maintain the majority of existing services as central-

ized in Serbia, but a system should also be established that would ensure

that these centralized services cooperate with the elected authorities on

levels of lower administrative units, that they submit reports once a year

(or as often as requested), and that they examine the demands and pro-

posals of the elected authorities. The constitutionally established admin-

istrative units (autonomous provinces, towns, municipalities) should

have a direct impact on the definition of the tasks belonging to the ser-

vices for the maintenance of law and order in their region. They should

also give consent to the appointment of high officials of the police orga-

nization unit that is responsible for that region. Larger towns should

have their own police forces for the maintenance of law and order in

public places, to punish parking offences and to be present in the vicinity

of schools and on nearby pedestrian crossings in order to ensure the

safety of pupils.

Offices for citizens’ contacts with the police should be set up inlarger areas of habitation (e.g. at the local residents’ communities thatstill seem to exist). Citizens could there, on a voluntary basis, organizeactivities of use to the community as a whole such as neighbourhoodwatch programmes with people on duty and touring specific areas,warning of delinquent conduct, receiving and passing on reports, etc.This system of community policing has been accepted in many coun-tries. It could be introduced on an experimental basis in our country in asmall number of places. It would be useful if training were organized onthis subject with foreign experts participating and if short stays abroadwere organized for the people who are to launch this concept of policing.

The present, mainly “office” form of work should be replaced bya system of patrolmen in charge of a certain area.

16. The issue has been launched amongst the public of the

establishment of judicial police that would be in charge of criminal

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procedures. This proposal deserves detailed examination in the light of

solutions for the entire penal-legal system.

17. Regulations should be adopted for the fight against corruptionand bodies set up to ensure such regulations are implemented effec-tively.

18. Training should be organized for those police members thatretain their jobs after the essential reduction of the currently hypertro-phied organization. This training should place accent on a new attitudetowards task performance, i.e. strict adherence to the law and humanrights. The detailed training program should also provide for the partici-pation of foreign experts.

19. International police cooperation should be renewed mainly byfilling the “empty chair” in the initiative of South Eastern Europe andthen by submitting requests for Serbia/FRY to join Interpol (which im-plies abandoning the thesis of continuity). Cooperation should be estab-lished with Europol. It is of particular importance to become involvedagain in the UN bodies that deal in issues of importance for civil secu-rity.

20. The standards of the European Union in the sphere of interna-tional criminal-legal assistance should be accepted.

21. The national prosecution bodies should take an active stand

on the problem of finding and bringing to trial persons suspected or ac-

cused of grave violations of norms of international humanitarian law50.

22. There should be the simplification of resolving the nationalitystatus in the cases of displaced persons and the resolution of their civilrights.

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50 The possibility should perhaps be examined in this context of the issue of the am-nesty of certain categories of persons being set into motion in bodies of the interna-tional community in order to remove the present widespread uncertainty as topossible prosecution. This idea is not in line with the provisions of international hu-manitarian law, but its setting into motion would have the effect of a tactical move,and its possible realization would represent a stimulus for refugees to return to theirhomes.

23. The law should state that it is compulsory to consult non-governmental organizations in the case of issues of importance for civilsecurity. It is vital to define the obligations of the state towards these or-ganizations.

8.2. Protection of minority rights

8.2.1. Minorities and changes in the population structure

The resolution of the minority issue represents not only the pre-condition for the political stability of a state community, but it is also anindicator of its level of democracy. Besides, the protection of nationalminorities has one of the key places in the political transformation ofEastern European countries and their coming closer to European inte-gration processes.

According to the census of 1991, out of the total 9,778,991inhabitants of Serbia, Serbs accounted for 65.9%, Yugoslavs for 3.3%,Montenegrins for 1.4%, while members of national minorities and eth-nic groups accounted for the remainder. Under that census, Albanianswere the largest minority in Serbia, accounting for 17.1%, the huge ma-jority of whom inhabited Kosovo and Metohija, where they accountedfor 82.6% of the population.

The above-mentioned figures are from the first quarter of 1991,before the break-up of SFRY. War in the area of former Yugoslavia,compounded with political tension and pressures, caused great migra-tion movements throughout the whole of the former SFRY, whereby na-tionality and confession had a decisive impact on the proportions anddirections of those movements.

It is thus predicted that at least half of the refugees from Bosniaand Herzegovina (some 400,000) and Croatia (some 260,000) will re-main permanently in Serbia, which will increase the portion of Serbs byaround 5%. These figures do not, however, reduce the importance of theminority issue in Serbia. On the contrary, refugees in essence represent atype of specific minority that is a particular problem for Serbia.

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Serbs that fled from other areas of the former SFRY are a specific

minority as they are a minority within the majority Serb nation and fre-

quently, on account of differences to the autochthonous majority, they

are the subjects of intolerance. They are a particularly sensitive minority

as their basic human rights and freedoms were first threatened in the

places where they lived, for which reason they abandoned their homes,

and then, as refugees they are treated as foreign citizens or expatriates.

Refugees are therefore a specific minority not only de facto but also

from a formal-legal viewpoint: they are people to a huge extent without

nationality, without homes and without permanent employment.51

Lack of tolerance is manifested by the autochthonous population,regardless of ethnic origin, and this is not only on account of the socialand cultural differences that the refugees bring with them from theplaces they came from, but also because, given the conditions of graveeconomic crisis and external sanctions, blame for one’s own difficultsituation is frequently laid at the feet of “newcomers”.

An additional problem for refugees lies in the fact that a large

number of them are concentrated in multi-ethnic Vojvodina52, with the

result that their presence among national minorities gives rise to dis-

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51 According to figures from 1996, 5.2% of refugees were employed, 3.9% temporarilyemployed and 74.1% unemployed, while three years later 85% of refugees were liv-ing in rented accommodation. If we add to this the fact that in October 1999 the aver-age four-member refugee family had to allocate 5.4 average wages in FRY for theminimal food requirements and rent, we obtain a somewhat clearer picture of the dif-ficult position of refugees. For more details see: Ratko Bubalo, Odnos izbeglica i

nacionalnih manjina u Srbiji (The Relation between Refugees and National Minor-

ities in Serbia), a paper given at a gathering entitled National Minorities in Serbia or-

ganized by the Helsinki Human Rights Committee in Serbia, Novi Sad, 8 and 9

September 2000.

52 According to a census performed by UNHCR in 1996, the Commissariat for Ref-ugees of Serbia and the Commissariat for Displaced Persons of Montenegro, therewere 229,811 refugees in Vojvodina, that is 42.7% of the total number in Serbia. Ac-cording to that census, refugees accounted for 12.9% of the population in Vojvodinaas numbered in the 1991 census, while the figure for Belgrade was 10.7% and the fig-ure for Serbia - 6.3%.

satisfaction both due to everything mentioned above and because they

“alter the ethnic structure”.

On the area of Serbia without Kosovo (Kosovo having been under

compulsory international administration since June 1999), the largest

national minorities in Serbia are Hungarians and Muslims, which in-

habit relatively homogeneous territories - Hungarians in northern Ba�ka

in Vojvodina, and Muslims in Sand�ak. And while the Kosovo problem

will be resolved with particular care, and even with the arbitration of the

international community, the problem of national minorities will remain

a priority for the new, democratic Serbia.

8.2.2. Problems that are a potential obstacle in the way ofresolving the minority issue and tasks facingdemocratic Serbia

The question of where to act emerges as one of the most generalproblems: on which area will the minority problem be dealt with andthrough which acts? On the area of the federal state, the present FR Yu-goslavia, which would be logical if the common state of Serbia andMontenegro survives, or parallel, on the area of each of them separately,that is in the scope of the constitutions and the laws of the Federationmembers, as well as on the federal level, as it has been to date?

Thus, one of the priorities of the future organization of these rela-tions will be the establishment of jurisdiction and the adjustment of theconstitutions of the two state members with the constitution of the fed-eral state, if it survives.

An additional problem is the unresolved status of Kosovo, whichis under compulsory international administration and on the territory ofwhich the laws of Serbia and FR Yugoslavia are not applied.

Besides general minority problems, particular problems also arisestemming from the specific position of certain minorities: besides theold minorities on the area of FRY, there has, with the break-up of SFRY,been the emergence of “new minorities” made up of members of theformer “constitutive nations” – Croats, Muslims and, somewhat less

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numerous, Macedonians and Slovenes. The political representatives ofsome of them are seeking a change of name (Muslims – Bosniacs) andthe status of national minority. Such a status is also being sought bysome of the political representatives of Romas, who are treated as anethnic group. Demands for a change in status from ethnic group into na-tional minority are also being heard amongst Wallachs, amongst whomthere also exists a number of persons who consider that they are, in fact,a Romanian national minority. Similar problems are encounteredamongst Bunjevci and Croats, and Ruthenians and Ukrainians.

The general, common problems of national minorities would cer-tainly have to be solved with the highest and most general constitutionalacts, ranging from the Constitution and laws to supplementary legalacts, while specific problems, particularly minority problems, should beresolved through suitable governmental policy, that is a policy chan-nelled towards respecting the specific interests of the separate minoritycommunities, a policy to generate an atmosphere of tolerance and mu-tual respect amongst the minority communities.

In addition to conducting an appropriate policy, Serbia is faced

with the establishment of a minority standard as established by the al-

ready-mentioned OSCE and Council of Europe documents.

To this end, it is necessary:• to make changes in internal legislation and to pass a separate

law on national minorities;

• to establish the institution of ombudsman or a council for mi-

nority issues (which exists in the Constitution of Montenegro),

which would ensure direct cooperation and coordination be-

tween the state and representatives of national minorities;

• to establish bilateral agreements with neighbouring countries

on the protection of national minorities.

Serbia, as a future equal member of OSCE shall honour that orga-

nization’s documents that are morally and politically binding upon

member countries. Furthermore, the legal principles of the Framework

Convention for the Protection of National Minorities, which establish

the goals of the signatory countries, should also be binding on

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democratic Serbia. The principles mentioned in the Convention shall be

implemented through national legislation and corresponding gov-

ernment policy. Serbia shall stand behind that Convention both practi-

cally and politically, although not even all the present Council of Europe

members have done so.

The minority standard that Serbia should establish would ensure

the members of national minorities the following:

• the right to declare themselves members of national minorities;

• the equality of members of a national minority with members of

the majority nation with respect to basic freedoms and human

rights, and a ban on all forms of discrimination against minority

members;

• the right to use their own language in private and public life (in

business relations, before the courts and other state bodies, in

the media, at public gatherings, cultural events, in public in-

scriptions, in religious ceremonies…).

Besides these basic rights of the members of minorities as indi-

viduals, members of national minorities would also be guaranteed the

rights that they can enjoy together with the other members of their

group. There can therefore be the differentiation of the rights of mem-

bers of the national minorities that enable survival, on the one hand,

and unhindered development as a separate group, on the other

hand:

• the right to free expression, the preservation and development

of minority identity (ethnic, cultural, language or religious

identity);

• the right to foster and develop their own culture (including the

right to found cultural institutions, societies, associations…);

• the right to found and preserve, in line with national legislation,

their own educational, cultural and religious institutions, orga-

nizations or associations;

• the right to profess and practice their own religion, to religious

schools, institutions and organizations;

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• the right to the establishment and maintenance of unhindered

mutual links, as well as links with the mother nation;

• the right to have access to, disseminate and exchange informa-

tion in their own mother tongue;

• the right to found and maintain organizations or associations in

their own country and to participate in international non-

governmental organizations.

Serbia should conduct an active policy towards minorities, just

as suggested in the relevant OSCE and Council of Europe documents. It

would undertake to:

• protect the identity of national minorities (ethnic, cultural, lan-

guage and religious) and to create the conditions for the “pro-

motion of that identity” and, by taking the necessary measures,

also to consult the minority organizations or associations;

• endeavour to provide, besides learning the official language,

teaching of the mother tongue of the national minorities or

teaching in their mother tongue, and, “as and when possible and

essential” the use of their language before public bodies in ac-

cordance with corresponding national legislation;

• promote an atmosphere of mutual respect, understanding, co-

operation and solidarity amongst all persons living on its terri-

tory and encourage the resolution of problems through dialogue

on the principle of the rule of law;

• respect all obligations from existing conventions on human

rights and other corresponding international instruments and

examine the possibility of joining the corresponding conven-

tions, if they have not already done so, including those that en-

sure right to complaint on the part of individuals;

• cooperate in national minority issues with the competent inter-

national organizations;

• respect the right of members of national minorities to truly par-

ticipate in public life, including participation in matters that

concern the protection of the national minorities.

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Democratic Serbia shall also enable the monitoring of the im-

plementation of the Framework Convention and of the OSCE minority

standard.

Serbia should respect the prevailing stand in international rela-tions in Europe that the protection of national minorities, which is partof the protection of human rights, does not fall exclusively into the do-main of the state, but may also be a legitimate object of interest for theinternational community. In this sense, assistance would also be wel-come from such institutions as the High Commissioner for National Mi-norities, which is an instrument for the prevention of conflicts in theearliest possible phase and which can, as an informal intermediate, con-tribute to diminishing tension and creating conditions for an effectivedialogue, as well as giving recommendations for conducting a fittingpolicy towards national minorities, providing assistance in the elabora-tion of legal texts of importance in the domain of the minorities, promot-ing dialogue between the government and representatives of minorities,etc.

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9. MILITARY SECURITY

9.1. Introduction

The new authorities in Serbia/FRY should, after democraticchanges in Serbia, focus on preparations for comprehensive cooperationwith the EU in order to create the conditions for the country’s future as-sociation. The chances for FRY’s future entry into the EU will increaseto the extent to which the new authorities are capable of modernizingand reforming the state and society.

One of the first tasks facing the new authorities is to improve the

internal security situation. Parallel to this, they should start normalizing

relations with neighbouring countries. After joining the Stability Pact,

OSCE and the UN, FRY could help to pacify the region. In that context,

the country’s admission to the Council of Europe may be expected. Only

in these frameworks will FRY be able to cooperate unhindered with the

EU.

The new authorities will have to define their external and securitypolicies, and it is highly unlikely that joining the Euro-Atlantic securitysystem will be a priority objective. There are several fundamental rea-sons why it is unlikely that FRY will apply for membership in NATO orthe Partnership for Peace in the near future, and these reasons are hard todispute. There are two major reasons: firstly, the disastrous (material,political and socio-psychological) consequences of the NATO aggre-ssion on FRY and, secondly, the fact that NATO is outside the UN sys-tem of collective security and the procedures for the democratic civilcontrol of the army.

This notwithstanding, the new authorities will have to find chan-nels and modes for cooperation (communication) with NATO and thePartnership for Peace. This is all the more the case as Kosovo andRepublika Srpska (Bosnia and Herzegovina) are both under NATO pro-tectorate, and FRY is surrounded by NATO member states

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In order to create the conditions for initial reforms, the new au-thorities will have to address the internal security parameters immedi-ately, thereby also creating conditions for a positive impact on FRY’sexternal security factors. Only when it has increased its security capaci-ties will FRY qualify for cooperation with the European Union.

9.2. Civil-military relations in FRY

The fact that the Yugoslav Army is not subject to democratic civilcontrol cannot be properly understood outside the context of the civil-military heritage of the Serbian and Yugoslav society. This is all themore so given the Yugoslav Army’s self-appointed role as the keeper ofthe military tradition of the Serbian nation.

The nature of civil-military relations in FRY was determined bythe war origins of the ruling regime and the army. That gave rise to nu-merous political limitations to the establishment of democratic civilcontrol over the Yugoslav Army:

a) due to the political system deprived of control of power and

the negation of the principle of the division of power, nominal

procedures and instruments for the civil control of the army

are out of use;

b) since the Federal Assembly has for eight years now failed to

adopt a strategy of the defence of FRY, no one in the country

may be certain as to who the Yugoslav Army may be used

against, for what purpose or in which manner. Thereby, lati-

tude has been left for arbitrariness in the supreme army com-

mand;

c) due to the absence of a state plan for the transformation of the

Yugoslav Army (the remnants of the Yugoslav People’s

Army), both the army and its top echelons have been left to

self-change, unmonitored by the public. This lowers the pros-

pects for a rational regulation of civil-military relations and an

adequate transformation of the inherited military organiza-

tion;

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d) repression of free public opinion has prevented the control

function of the media and NGOs in the process of democratic

civil control over the Yugoslav Army; and

e) the opposition’s delay in elaborating an alternative strategy of

social development has deprived citizens as well as members

of the Yugoslav Army of a programme for the modern regula-

tion of civil-military relations. This has consequently resulted

in the lack of promotion among the public of the urgent need

for placing the army under democratic civil control.

9.3. Lack of constitutional provisions for thedemocratic control of the Yugoslav Army

Any reading of the constitutional provisions regulating the posi-

tion and tasks of the Yugoslav Army, as well as the procedures for its

use immediately reveals an insoluble problem. For example, the first

paragraph of Article 115 of the FRY Constitution stipulates that “the

constitutions of the member republics, federal laws, laws of the member

republics and all other regulations and general acts must comply with

the Constitution of the Federal Republic of Yugoslavia”. Despite the

fact that it has been eight years since the proclamation of FRY, the Con-

stitution of the Republic of Serbia still goes against this order in its pro-

visions dealing with the defence and the army.

A comparison of the FRY and Serbian constitutions warns thatYugoslavia, nominally, has two armies subject to two independent cen-tres of supreme command. The chain of command of the YugoslavArmy starts with the Supreme Defence Council (a collective body),which implements its decisions through the President of the FRY. Thecommand jurisdictions of the FRY President are, however, strictly lim-ited by prior Council decisions. This means that they derive their legal-ity from Council decisions and may only be legitimized on that basis.

By contrast, the Serbian President is, in his (fictitious) commandof the armed forces, limited only by the Republican Constitution andlaws. Moreover, we see that any of the specific situations of state

109

emergency may be proclaimed in Serbia independently from the federalauthorities. It follows from the provisions of both constitutions that theinternal use of the army may be individually ordered by the FRY Su-preme Defence Council and the Serbian President, as soon as it (thearmy) is assigned to him.

The numerous ambiguities concerning the internal use of thearmy stem, among other things, from the deficient definition of its obli-gation to defend the constitutional order and from the incompletely reg-ulated procedure of the supreme command of the Yugoslav Army.

9.4. Proposal of initial measures

The first precondition for the lasting pacification and demilitar-

ization of Serbia/FRY has been created with the deposing of Slobodan

Miloševi�’s regime. After the peaceful change of power, the representa-

tives of associated citizens and the democratic opposition may apply

themselves to the resolution of numerous, mutually interconnected

tasks.

In order for Serbia and FRY to measure up to modern standardswith respect to the security of individuals (citizens), the society and thestate, there will, among other things, have to be a radical reshaping ofthe military-defence sphere. This requires a democratic transformationof the inherited civil-military relations with a view to establishing dem-ocratic civil control over the Yugoslav Army. For this purpose, a well-conceived and meaningful transformation of the Yugoslav Army is vi-tal.

9.4.1. Transformation of civil-military relations

The initial prerequisites for the democratic civil control of theYugoslav Army may be created by changes and additions to the consti-tutions of FRY and Serbia as well as to the legislation on the YugoslavArmy and defence. The previous analysis indicates that, for this pur-pose, the following elements of civil-military relations will have to beregulated in a better and/or different way:

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1. Defence of the constitutional order

a) first alternative: abolish the Yugoslav Army’s obligation to

defend the constitutional order,

b) second alternative:

• in the Constitution of FRY define precisely the scope of the

concept of “constitutional order", as well the ways in which it

can be jeopardized;

• in the Constitution or legislation on the army and defence de-

fine precisely the procedures for decision-making on the mili-

tary defence of the order, and define strictly the jurisdiction of

the army, as well as the objectives, forms and methods of ac-

tivity in the defence of the constitutional order;

• make the internal use of the Yugoslav army conditional upon

the prior consent of the federal and republican parliaments, al-

lowing for a specific period of time to re-examine or confirm

the previous decision;

• make the decisions of the Supreme Defence Council on the

ways of using the army for the defence of the constitutional or-

der conditional upon the consensus of its members;

• oblige the Federal Constitutional Court to look into the consti-

tutionality of a decision on the internal use of the Yugoslav

Army within 48 hours and, if it is found to be contrary to the

Constitution, the Federal Constitutional Court should be au-

thorized to invalidate the decision and restore the previous sta-

tus quo.

2. Supreme command of the army

• abolish all provisions of the Constitution of the Republic of

Serbia referring to war and peace, the armed forces and the su-

preme command of the Serbian President;

• elaborate precisely in the FRY Constitution the form of deci-

sion-making in the Supreme Defence Council (when con-

sensus compulsory, and when outvoting is permitted, if it is

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permitted at all) and that only when all three Council members

are present;

• define in the Constitution the right of the Supreme Defence

Council to check and sanction the (non)compliance of the

FRY President’s command measures with its own decisions;

• elaborate procedures and instruments for the establishment of

the political and legal accountability of the Supreme Defence

Council and the FRY President in their command of the Yugo-

slav Army to the Federal Parliament and the Constitutional

(Federal) Court;

• separate supreme command of the army in wartime from that

in peace: e.g. enumerate the activities and/or jurisdictions of

the Supreme Defence Council and the FRY President con-

cerning command in peace that have to be countersigned by

the federal prime minister.

3. Relations between the Defence Ministry and the Yugoslav

Army General Staff

• at time of peace, the Yugoslav Army and its General Staff

should, in the first instance, be subordinate to the defence min-

ister, and the Constitution should stipulate that the office of

defence minister be held by a civil figure;

• their peace and war-time jurisdictions must be specified and

their mutual relationships (superiority-subordination) de-

fined;

• matters within their jurisdiction should be clearly defined with

respect to the adoption of bylaws regulating civil-military re-

lations and relations within the army;

• the main inspection body of the Yugoslav Army should be

subordinate to the Supreme Defence Council or the defence

minister;

• the military security service should also be rendered subordi-

nate to the defence minister, while the promotion and appoint-

ment of generals would require his approval.

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4. Inspection, supervision and civil control

• the concept and procedures of the civil control of the army

should be introduced into the Constitution and laws, and the

subordinate nature of the Yugoslav Army to the civil, demo-

cratically elected authorities should be specifically underlined

(a new article of the Constitution should read: “The Yugoslav

Army is placed under the democratic civil control of the le-

gally elected legislative and executive bodies of authority and

the citizens”);

• the laws should emphasize the control dimension of the de-

fence (Yugoslav Army) budget, particularly as related to the

procedures for supervising the spending of allocated re-

sources;

• the Constitution and laws should empower the Federal Parlia-

ment or the relevant parliamentary committee to inspect the

Yugoslav Army and the defence system;

• there should be the regulation of the obligation on the part of

the defence ministry to report regularly to the Federal Parlia-

ment or the committee concerned on the state of affairs in de-

fence and the army:

• the head inspection body of the Yugoslav Army should be le-

gally obliged to report its findings to the Supreme Defence

Council and the Federal Parliament (or the parliamentary

committee for defence and security) on a regular basis.

5. Protection of constitutionality and legality in the army

• the jurisdiction of military courts and prosecutors over civil-

ians, especially in time of peace, should be reduced;

• a law should reduce the jurisdiction of the military security

service and the military police over professional soldiers and,

especially, citizens;

• the scope of the military (state) secret should be narrowed and

specifically defined;

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• constitutional guarantees should be provided for the human

freedoms and rights of professional soldiers and citizens

within the jurisdiction of the army, while the General Staff of

the Yugoslav Army and the defence ministry must be obliged

to respect international conventions in war and peace;

• a law should be passed introducing the institution of direct ap-

peal of army members to the defence minister and the Federal

Parliament (parliamentary committee), as well as the obliga-

tion of the latter to rule on the appeal within a given deadline,

while fully protecting the petitioner;

• laws should specifically elaborate and guarantee the right to

the civilian performance of military service, as well as the

right to conscientious objection.

6. Control role of the public

• the Constitution and laws should guarantee the right of the me-

dia, NGOs, expert civil institutions and citizens to participate

in the democratic civil control of the army and the defence sys-

tem;

• the Defence Ministry and the General Staff of the Yugoslav

Army should be obliged to truthfully inform the public and

civil society institutions on a regular basis (and on demand),

that is, of course, in line with rulings on the military secret).

9.4.2. Transformation of the Yugoslav Army

In the transformation of the army as it is today, the new authori-ties will have to reckon with the following facts:

• the professionalization and modernization of the Yugoslav

Army is a complex, lengthy and socially and economically ex-

pensive process, which, in the planning and implementation

phases, requires the engagement of all, particularly the scien-

tific potentials of society;

• the transformation of the Yugoslav Army is possible only if

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accompanied by fundamental social changes and on the basis

of a modern social development strategy;

• the Yugoslav Army cannot change by itself, but that process

must evolve according to a state plan, under the guidance and

control of Parliament, the Government and the Supreme De-

fence Council and with the participation of the public;

• the transformation capacities of the existing army are un-

known, and social, political-ideological and professional re-

sistance of a part of the commissioned cadre is to be expected;

the corps of generals and key persons within it will probably

be the least prone to changes that indicate a decrease or loss in

present power and privileges;

• the creation of a professional and modern army demands a

radical break with the Yugoslav People’s Army and the

SFRY, in political, systemic, conceptual, organizational,

value and ideological terms; and

• the new military organization cannot be properly based with-

out dealing with the “war baggage” of the Yugoslav People’s

Army and the Yugoslav Army, and this requires the expert

identification of the causes, substance and consequences of

their war engagement, as well as the political identification

and, if necessary, the criminal sanctioning of those who issued

and carried out the orders.

A transitional period of time, the length of which is difficult to de-termine, is to be expected during which the emerging new system andthe inherited army undergoing transformation will coexist. It will there-fore be necessary first to undertake a series of short-term measures to ac-tivate the existing systemic potential with a view to subordinating thearmy to Parliament, and using its human and material resources to setthe transformation underway.

Transitional measures presuppose the return of the political

power and decision making to the parliaments of FRY/Serbia and the

federal/republic governments, along with the reduction of the FRY pres-

ident’s jurisdiction to within the constitutional framework and the

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suspension of the jurisdiction of the Serbian President and Parliament as

concerns command of the army, the proclamation of war and peace; and

the commencement of the demilitarization of the republics’ police

forces.

The short-term tasks of the transformation of the Yugoslav Armymust be carried out without additional demands from the state budget.

The existing resources must be used rationally in order to step upthe current efficiency of the Yugoslav Army and create the initial condi-tions for its further professionalization and modernization.

These measures would be implemented by a special (authorized)commission of the Federal Government or Parliament in cooperationwith the General Staff of the Yugoslav Army and the defence ministry,on the basis of findings of independent mixed (civil-military) expertgroups.

The main tasks in this respect would include:• creation of conditions for the introduction of the principles

and methods of the democratic civil (parliamentary and pub-

lic) control of the Yugoslav Army;

• elaboration of a programme for the optimization of the Yugo-

slav Army, with a view to setting underway its professional

and moral renewal;

• elaboration of a programme for rationalization and economy

in the Yugoslav Army to put a halt to the impoverishment of

its units and members.

Long-term measures presuppose a modern strategy of social de-

velopment, the market-oriented and democratic reconstitution of FRY,

the redefining of relations within the federation, the return of FRY into

the international community and the political, economic and security

consolidation of FRY.

The ultimate objective would be to create a numerically small,modern, well-equipped and highly mobile (adaptable) professionalarmy, subject to civil authorities and capable of responding to the initialattacks of an aggressor and ensuring the activation of the defence systemand the transition of society onto a war footing.

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The main tasks would include:• establishment of democratic civil (parliamentary and public)

control over the Yugoslav army;

• radical, professional and moral, transformation of the Yugo-

slav Army;

• incorporation of Serbia/FRY and the Yugoslav Army into re-

gional, European and world systems of collective and com-

mon security.

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10. PRIORITY TASKS OF FOREIGN POLICY

10.1 Introductory remarks

One of the paramount priorities to emerge after the fall ofSlobodan Miloševiæ’s regime and in the light of the democratic changesunderway in Serbia is the redefinition of overall FRY foreign policy, forwhich qualitatively new foundations must be laid in the shortest possi-ble period.

A vital element of this strategy is the elaboration of an overallplatform and a list of priority foreign policy measures and moves to beundertaken with the aim of rapprochement with the European Union, astrategic goal on which virtually general consensus exists in the country.Foreign policy decision-makers should, in this context, take steps onforeign policy and diplomatic levels both immediately and on a long-term basis in order to accelerate rapprochement with the EU and removethe obstacles that have accumulated over the last ten-year period.

The essential starting point in the process of the rapprochement toand integration of non-EU-member European countries in the EU is thefulfillment of the so-called Copenhagen criteria53 and the acceptance ofthe so-called acquis communautaire (EU achievements)54 in order forthe commencement of the mentioned process to become feasible. The

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53 At a meeting of the Council of Europe in Copenhagen in 1993, the heads of states ofEuropean Union member countries agreed that countries from Central and EasternEuropean could become associate members if they so wished. Those countries couldnot be full members until they met the following economic and political criteria: sta-bility of institutions that ensure democracy, the rule of law, respect of human rightsand minorities, the existence of an effective market economy and the ability of com-panies to withstand the market pressure of forces in the EU, the ability to undertakethe obligations stemming from membership, including adherence to the objective ofpolitical, economic and monetary union.

procedural process starts with the elaboration of a Feasibility Report,that is a document in which the EU Commission determines the state ofaffairs and the position of the candidate country towards the demandsand criteria of EU, with the ultimate aim of the conclusion of a so-calledAgreement on Stabilization and Association. On the basis of this report,the EU Council passes a guideline on the commencement of negotia-tions on the signing of an Agreement on Stabilization and Association.55

In order to achieve this objective, FR Yugoslavia’s foreign policyis faced with a large number of general and concrete tasks, and thesecould be classified in the following manner:

• tasks related to the definition of the general principles and stra-tegic goals of foreign policy;

• tasks related to relations with international organizations andwith the major states;

• tasks related to relations with neighbouring countries;• tasks related to the organization of the diplomatic service.

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54 Acquis communautaire (Community achievements) comprise the rights, obligationsand standards binding upon all member countries that link them within the EuropeanUnion. Acquis are not only strict legal obligations but also encompass: the content,principles and political objectives of inaugural contracts, legislation adopted by theimplementation of inaugural contracts and the verdict of the EU Court, declarationsand resolutions passed by the EU, measures referring to common foreign and secu-rity policy, measures referring to judicature and internal affairs and internationalcontracts concluded by the Community and contracts among member states in thedomain of Union activity. Each country wishing to become a member of the Euro-pean Union must accept the decisions contained in the inaugural contracts and adjusttheir legislation and current policy to acquis communautaire.

55 The last Feasibility Report to have been published by the EU Commission was onCroatia. See: Report from the Commission on the feasibility of negotiating a Stabili-

zation and Association agreement with the Republic of Croatia, Commission of theEuropean Communities, Brussels, 24,05.2000, COM (2000), 311 Final.

10.2. Tasks related to the definition of the generalprinciples and strategic goals of foreign policy

Due to the general degradation of the international position andrenown of FR Yugoslavia caused by the policy of the former regime, athorough and prompt examination is necessary of the basic tenets of FRYugoslavia’s foreign policy to date. A priority task in this context is tobring about a deep-seated change in FR Yugoslavia’s foreign policy and

diplomatic position on new processes in the international community.It is vital to make a radical break with the many misconceptions

and approaches that marked FR Yugoslavia’s foreign policy in the pe-riod of the Miloševiæ regime:

Attitude towards the new international milieu. One of the mostcharacteristic misconceptions of Yugoslav foreign policy and diplo-macy in the past concerned the depth and nature of changes in the inter-national community that started at the end of the eighties, on the onehand, and the significance and extent of modern concepts that todayform the basis of mutual relations amongst factors in the internationalsystem, on the other hand. In that context, it is of particular importanceto abandon what was perhaps the greatest misconception of Yugoslavforeign policy in the past: the conviction that changes in the interna-tional system after 1989, that is what is called the “new world order”, arebasically bad and unfavourable and, in themselves, negative or ratherdangerous to small countries and nations. One should take into accountthat now, perhaps more than ever before in this century, prime movers inEurope, as indeed in the modern world as a whole, have convergent ap-

proaches to the fundamental values and future of the continent, values

that will place primary accent on the strengthening of democracy, mar-

ket economy, and the rule of law, including scrupulous respect for hu-

man rights.

Concept of state sovereignty. The abandonment of the above-mentioned misconceptions would lead to the easier dissipation of othersstemming from them and referring to more concrete issues and princi-ples involved in the functioning of the contemporary international

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community. We are here thinking mainly of the misconception that iscontained in closing one’s eyes to changes in the concept of the extent ofstate sovereignty. In order to draw close to the European Union, it is nec-essary to have a realistic perception of the essential evolution undergoneby the concept of sovereignty in international law and international poli-tics. This is all the more the case as integration in the European Union isfounded par excellence on the relativization of sovereignty and its trans-fer to supranational bodies. This also presupposes totally abandoning

the classic concept of sovereignty, which, in conditions of bipolar con-

frontation, meant the right of a government not to be accountable to any-

one for acts towards its own population, as this concept has undergone

radical change.Attitude towards international law. It is necessary to disassociate

oneself resolutely from the unfounded insistence, which was character-istic of previous foreign policy, on the erroneous claim of the prece-dence of internal law over international law. It is wrong and illegal toevoke the limitations of internal constitutional legislation in the imple-mentation of undertaken international obligations. A change of ap-proach in this domain is also one of the essential preconditions forinclusion into the European integration processes, for it is totally unreal-istic to expect that inclusion in the process of the expansion of the Euro-pean Union will be allowed to countries with above-mentioned archaicapproach to international legal obligations.

Attitude towards democracy and interpretations of the so-called

“Yugoslav crisis”. On the foreign policy and diplomatic scene, to refrain

from accusing international factors for all the misfortunes befalling FR

Yugoslavia and from totally exonerating domestic factors would have amajor practical impact in overcoming the many obstacles facing FR Yu-goslavia’s foreign policy in the period to come. This would be particu-larly true in its relations with neighbouring countries and with respect toits obligations stemming from the formation of The Hague Tribunal.

Improvement of international position. The redefinition of FRYugoslavia’s foreign policy should, as one of its main objectives, havethe expansion of the circle of allied countries and the consolidation of

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alliances achieved, which is the precondition for not only classic butalso all modern foreign policy and diplomacy. Thorough work is neces-sary in order gradually to remove the impacts of FR Yugoslavia’s diplo-macy to date, which have truly been crushing, and accept the fact thatthe normalization and promotion of relations with the USA should beone of the country’s strategic priorities. Mutatis mutandis, the same con-clusion can also be drawn in the case of FR Yugoslavia’s relations withthe most important members of the European Union and with the Euro-pean Union as such.

There must be a fitting redefinition of the approach of Yugoslavforeign policy to relations with Russia, for the characteristics of Yugo-slav foreign policy and diplomacy have been shown up the clearest inthe way in which Russia was officially treated and its international roleassessed after the cessation of the cold war. The strategic goal of FR Yu-goslavia is not a renewal of the conflict between Russia and the West,and even less FR Yugoslavia’s alliance in such a case on the side of Rus-sia, where it would find itself on a side that is inferior, particularly eco-nomically and technologically. The same is true of the in many waysfrivolous initiative (motivated exclusively by reasons of internal policy)concerning the strengthening of not only relations of alliance but also in-stitutional links between FR Yugoslavia and Russia and Belarus. Thatinitiative was not only fundamentally unreal and retrograde, but it alsorepresented a major obstacle in the normalization of relations with theEuropean Union. Yugoslav-Russian relations can only evolve in condi-tions of the normalization of Yugoslavia’s international position and itsassociation with European political and economic integration trends.Similarly, in changed circumstances, this is also true of FR Yugosla-via’s relations with China, which should remain an important foreignpolicy partner of FR Yugoslavia, but without the introduction of ideo-logical dimensions into that partnership.

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10.3. Tasks related to relations with internationalorganizations and with the major states

The acceptance of radical changes in the approach to the coun-try’s foreign policy strategy on the described lines would contribute to arapid change in its international position, which is still very unfavour-able despite the new situation in the country. The democratic changeshave, by the very fact that they have occurred, done away with the gen-eral odium in the international community towards FR Yugoslavia, suchas was provoked by Slobodan Miloševiæ’s regime. In order to achieve animprovement in FR Yugoslavia’s international position, however, thesechanges must be consolidated and further developed by taking the nec-essary steps towards the normalization of relations with the most impor-tant international organizations and certain major states in a thoroughand pragmatic manner and as promptly as possible. This is the basic pre-condition for the normalization of relations and for setting underway thenegotiating process with the European Union.

United Nations. Prompt and simple measures are necessary tonormalize the status of FR Yugoslavia in the United Nations, and thiswas done on 1 November 2000.

Problem of the continuity of SFRY. The submission of a requestand UN membership in the capacity of newly created state implies thatYugoslavia must renounce the demand for the recognition of its conti-

nuity with SFRY. In that sense, the problem of the succession and conti-nuity of former Yugoslavia must be approached with the acceptance ofthe conclusions of the Arbitrational (so-called Badinter) Commissionaccording to which the former Yugoslavia disintegrated with the break-up into republic members within the existing borders of the then federalunits and according to which none of the heritor states can claim exclu-sive continuity with the former SFRY. Although this demand at firstsight seems unacceptable even to democratic forces in FR Yugoslavia,basically speaking there are no pressing reasons to further insist on con-tinuity. Recognition of continuity does not carry in itself any particularadvantages but only numerous problems, especially in the domain of

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cooperation with international financial institutions. Furthermore, re-nunciation of the right to continuity is certainly a pre-condition for thenormalization of relations with the European Union and the setting un-derway of the negotiating process.

Problem of so-called “external wall of sanctions”. A revision ofFR Yugoslavia’s foreign policy concerning the issue of continuitywould, given other necessary measures, lead to the gradual removal of

the so-called “external wall of sanctions”. Although the UN sanctionsimposed against FR Yugoslavia in June 1992 were formally lifted fouryears later, the so-called “external wall of sanctions” has remained since1996 as a consequence of the non-fulfillment of international obliga-tions undertaken. This is a non-formalized list of demands by the USAand the countries of the European Union that the Miloševiæ regime wasrequired to fulfill if it wished to obtain support for the normalization ofFR Yugoslavia’s international position and bilateral relations withthem. These demands include: a) the strict implementation of theDayton Accords, including cooperation in delivering persons accused ofwar crimes committed in the former Yugoslavia to the International Tri-bunal in The Hague; b) the resolution of the problem of the succession offormer Yugoslavia in line with the conclusions of the Arbitrational (so-called Badinter) Commission; c) the resolution of the Kosovo problemand the regulation of the position of national minorities in FRY in linewith accepted international standards, and d) the democratization of theinternal system with accent on fair elections, freedom of the media, pri-vatization, etc. It is essential for the redefined foreign policy of FR Yu-goslavia to show itself cooperative with respect to each of the mentioneddemands and, unlike the Miloševiæ regime, to examine them seriously.This is particularly the case as all the mentioned demands, essentiallyspeaking, are based in obligations that FR Yugoslavia has to fulfill onthe basis of many UN Security Council resolutions, the Dayton Accordsand OSCE documents accepted by FR Yugoslavia itself.

Reentry into OSCE. One of the priorities of FR Yugoslavia’s newforeign policy is reentry into OSCE, which was achieved on 10 Novem-ber 2000. When making decisions in this direction, one should bear in

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mind the initial reasons for FRY’s exclusion from that international or-ganization. Yugoslavia was, in fact, suspended from OSCE after it hadrefused to receive OSCE observer missions to supervise the achieve-ment of standards for the protection of minority collectivities in thecountry (Kosovo, Sand`ak, Vojvodina). The lack of readiness to meetOSCE demands and thus enable transparency in the authorities’ conducttowards minorities in FRY deprived Yugoslav diplomacy of the possi-bility to participate in various OSCE activities, the importance of whicheven Miloševiæ’s regime could not deny.

Membership in the Council of Europe. One of the most importantpreconditions for the normalization of relations with the European Un-ion and inclusion in the rapprochement procedure as provided for in theEuropean Union’s strategy of expansion with respect to countries ofCentral and Eastern Europe is doubtless FR Yugoslavia’s membershipin the Council of Europe and its undertaking of the commitments thatsuch membership presupposes. This is membership that is considered aunique “proof” that the country in question is deemed “fit”, in the sphereof the development of democratic institutions, legislation and practice,gradually to fulfill all other obligations required by membership in theEuropean Union or associate status in it. The obligations stemming from

membership in the Council of Europe represent the very essence of the

so-called Copenhagen criteria, and, therefore, this task should be of top

priority. Yugoslavia is the only European country without any kind ofstatus in the Council of Europe, which is a consequence of the former re-gime’s foreign policy, and such a state of affairs should be rectified assoon as possible.

Attitude towards the European Union’s Common Foreign and Se-

curity Policy (CFSP) and NATO. One of the important priorities of Yu-goslav foreign policy should be to take a position on the EuropeanUnion’s Common Foreign and Security Policy (CFSP), which imposescertain obligations on countries that are candidates for association. Oneof these obligations is that the autonomous foreign policies of the candi-date countries may not be contrary to the basic tenets of

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CFSP.56 The need for reexamining relations with NATO runs along thesame lines, which is, in the case of FR Yugoslavia, a very delicate taskon account of NATO’s air strikes on Yugoslavia in 1999. Despite that,and bearing in mind the existing realities and the fact that all neighbour-ing countries are included to a greater or lesser extent in the Partnershipfor Peace (PfP), democratic discussions should be launched on this sen-sitive issue too. Linkage with NATO is not a formal condition for rap-prochement with the European Union, but it is certainly a factor thatoffers greater prospects to candidates from Eastern Europe in the pro-cess of the promotion of relations with the European Union.

Normalization of diplomatic relations with certain major states.

Unlike all the other state heritors of the former Yugoslavia, FR Yugosla-via is still in the position of an incompletely recognized or unrecognizedcountry. Its diplomatic relations with a large number of countries in theworld (mainly the most influential countries) are not clearly defined,and those same states have denied FR Yugoslavia normal bilateral rela-tions and an equal place in the main international fora because of its for-eign policy and domestic policy acts and on account of the fact that itsformer head of state has been indicted by The Hague Tribunal. AfterNATO’s air strikes on Yugoslavia, diplomatic relations were broken offwith the most important countries: the USA and members of the

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56 In its Feasibility report, the EU Commission described Slovenia’s relationship to-wards EU’s so-called Common Foreign and Security Policy in the following way:“Following the declaration of independence on 25 June 1991, Slovenia has orien-tated its foreign and security policy towards the EU and NATO. Since it began partic-ipating in the political dialogue between the EU and the associated countries,Slovenia has been actively involved in the arrangements provided for under the Un-ion’s Common Foreign and Security Policy and whenever invited has supported EUactions within that framework”, Ljubljana 1997, http://europa.eu.int/comm/enlargeent/slovenia/op_07_97/b38.htm.A similar assessment was given concerning Bulgaria: “Bulgaria has been an activeparticipant in the dialogue arrangements provided for under the Union’s CommonForeign and Security Policy and when invited has supported EU actions within thatframework”, Commission Opinion on Bulgaria’s Application for Membership of the

European Union, http://europa.eu.int/comm/enlargement/bulgaria/op_07_97/b38.htm

European Union (Great Britain, Germany, France). The normalization

of these relations is one of the most urgent priorities facing FR Yugosla-

via not only in order to achieve a normalization of relations with the Eu-ropean Union, but because of that particularly. The gradualnormalization of diplomatic relations with the majority of states, forwhich the necessary conditions have now been created, would probablylead, besides yielding other positive consequences, to a liberalization ofvisa regimes with many countries that are now making it very difficultfor Yugoslav citizens to travel abroad.

10.4. Tasks related to relations with neighbouringcountries and regional organizations

The definition of the basic directions of FR Yugoslavia’s new for-eign policy should start from the fact that the relationship with neighour-ing countries and countries in the region is one of the most importantforeign policy criteria upon which the European Union insists concern-ing the requests of candidate countries from Central and Eastern Europefor integration in the EU. This criterion fundamentally contains the de-mand that the relations of candidate countries with neighbours should becomprehensively settled on a bilateral level, that mutual disputes (par-ticularly over borders) have been resolved, and that the country’s atti-tude towards minorities is founded on the standards established by theEuropean Union, the UN, OSCE and the Council of Europe. This is, fur-thermore, explicitly stated in the so-called Copenhagen criteria.

Regional cooperation. The overcoming of obstacles in the way ofFR Yugoslavia’s inclusion in regional organizations and initiatives willdepend on the resolution of the already-mentioned problems linked toFRY’s broader regional surroundings, on the one hand, and to the regu-lation of controversial issues with neighbouring countries, especiallywith countries that were former republics of SFR Yugoslavia, on theother hand. In this context, joining the Stability Pact for South Eastern

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Europe57 emerges as one of the most important foreign policy achieve-ments as membership in this Pact opens up broad possibilities for directsupport to the country’s economic reconstruction. This, in turn, wouldopen up prospects for FR Yugoslavia also to take its fitting place in otherregional initiatives of importance for the development of South EasternEurope (Royaumont Process, Black Sea Economic Cooperation –BSEC, Central European Initiative – CEI, South-East Europe Coopera-tion Initiative – SECI and South East Europe Cooperation Process –SEECP, etc.).

FR Yugoslavia’s foreign policy should tackle the many unsolvedproblems in relationships with neighbouring countries in an active,pragmatic and rigorous manner and act systematically towards the

achievement of good neighbourly relations. The already proposedchange in approach to the problem of the continuity of SFRY and themanner of the succession of former Yugoslavia would represent a majorcontribution to such an approach. That is to say FR Yugoslavia shouldabandon the non-flexible stands demonstrated by the former regime.

Bosnia and Herzegovina. A new and constructive policy is neces-sary towards Bosnia and Herzegovina, particularly the establishment of

normal diplomatic relations, while refraining from any abnegation ofthe so-called “Dayton order”, that is the territorial integrity of theBosnia-Herzegovina Federation and the treatment of Republika Srpskaas a bridge that will consolidate cooperation between the two sovereignstates. A normalization of diplomatic relations between FR Yugoslaviaand Bosnia and Herzegovina would probably also facilitate the resolu-tion of the problem created by the indictment lodged by Bosnia andHerzegovina against FR Yugoslavia at the International Court of Justicein the Hague on grounds of genocide. Both sides should work to reviveeconomic cooperation and transport links as well as generally, in thesphere of the liberalization of the movement of people, commodities andservices.

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57 FRY joined the Stabililty Pact for South Eastern Europe on 26 October 2000.

Slovenia. The same can also be said of FRY’s relationships withSlovenia, with which FR Yugoslavia has not established diplomatic re-lations although the two countries have separately and considerably ear-lier already published declarations on mutual recognition. The non-existence of diplomatic relations between FRY and Slovenia is ananachronism that should be removed as soon as possible, especially asthere are no unsolved problems in bilateral relations, with the exceptionof the issue of succession.

Macedonia. A change is necessary in relations towards Macedo-nia in the sense of refraining from interference in its internal affairs,such as was practiced by Miloševiæ’s regime, and putting a halt to thebelittling of its statehood. The regulation of border issues, that is thesigning of an agreement on border demarcation between the two coun-tries, should also be a priority of FR Yugoslavia’s policy withneighbouring countries.

Croatia. It is necessary to step up the process of the normalizationof relations with Croatia. There is a long list of bilateral problems – be-sides the problems of succession – that remain to be solved. These rangefrom the return of refugees of Serbian nationality to Croatia, the resolu-tion of citizens’ property and status problems and the movement of peo-ple, commodities and services to the bilateral resolution of the status ofminorities in the two countries. The solution of the Prevlaka issueshould be tackled without pressure of domestic policy motives(Miloševiæ manipulated with the resolution of this problem in the desireto render the position of Montenegrin President Milo Djukanoviæ moredifficult), while at the same time accepting the principles established inthe corresponding decisions of the UN Security Council, earlier agreedarrangements (the agreement between Æosiæ and Tudjman) and the lat-est agreements between the leaderships of Montenegro and Croatia. Itgoes without saying that a precondition for this is the more precise defi-nition of relations between Serbia and Montenegro, that is the achieve-ment of a permanent agreement between their democratically electedrepresentatives on the future constitutional status of the two componentsof FR Yugoslavia.

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10.5. Tasks related to the organization of thediplomatic service

An efficient and skilled diplomatic service is considered a vitalprecondition for countries applying for integration into the EuropeanUnion. This precondition too is explicitly stated in the so-called Copen-hagen criteria (the requirement concerning the existence of “stability ofinstitutions”). Major changes are needed in the organization of the Yu-goslav diplomatic service if the above-mentioned foreign policy objec-tives are to be achieved.

Diplomacy without autonomy of activity, such as existed inSlobodan Miloševiæ’s regime when it represented only an extension ofhis personal power, cannot yield the desired results. Particular prioritiesin this domain are the creation of the necessary latitude of activity thatallows the diplomatic service to be an active factor and participant in thecreation of strategic commitments and foreign policy priorities, on theone hand, and the establishment or reaffirmation of constitutional mech-anisms for the corresponding parliamentary control of diplomatic activ-ity, on the other hand. A qualitatively new personnel policy is alsonecessary, one that is totally different from the one to date and is basedon strict professional selection. What is most important is to forget onceand for all selection based on criteria of political loyalty or political op-portunism concerning internal politics and takes little or no heed of pro-fessional knowledge and experience. The fostering of the so-called“culture of optimal solutions” in diplomatic activity is a requirementfaced by political decision-makers due to the existing international situ-ation and the complexity of relations both with neighbouring countriesand the international community as a whole.

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EXECUTIVE SUMMARY: STEPS TOWARDSEUROPE

“A nation that steps into the future without a programme and

without having defined the points of its own issue cannot ex-

pect to achieve great success…

…A nation must have its own programme…”

(Stojan Novakoviæ, address in the National Assembly of the

Kingdom of Serbia, 1908)

1. It is in Yugoslavia’s strategic interest to become integrated

in the EU. It is, on the one hand, a way of ensuring easier access to the

most important market in the world and, on the other hand, an essential

precondition for resolving the development problems of the domestic

economy and the problems involved in the achievement of a stable dem-

ocratic society. It is also the only way for all countries of South Eastern

Europe, under the auspices of the EU, to liberalize international trade

and capital trends completely, reconstruct and, by adopting the Euro-

pean legal and institutional framework, to promote their own competi-

tiveness in the European and world economy. The European option will

enable Yugoslavia to strengthen existing links and normalize and renew

broken links with the former Yugoslav republics, which, prior to the

break-up of the country, accounted for two thirds of extra-republican

trade. The liberalization of cooperation with neighbouring countries of

Eastern and Central Europe and Mediterranean countries is the natural

springboard for preparations for the highly competitive West European

and world market.

2. FRY’s starting position is very bad. Virtually all quantitative

economic indicators are the lowest in the entire region, and the process

of transition has been halted, mistrust in the state and the absence of

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independent market institutions represent particular problems. The dra-

stic deterioration of all economic indicators in Serbia in the course of the

1990’s was preceded by stagnation in the 1980’s, and we can therefore

say that the economic crisis in Serbia has lasted since 1979. Given the

duration and the depth of the fall in the social product, this is one of the

longest and most deep-seated crises in the economic history of Europe

since the emergence of industry. It is therefore necessary immediately to

set underway the deep-seated, substantial and rapid reform of the entire

political, legal and economic system, on the path towards European in-

tegration, as the strategic objective of society and the country.

3. Macroeconomic reforms and the reconstruction of the

economy in order to achieve a return into the international community

are difficult tasks that the newly elected democratic authorities will not

be able to perform if they do not obtain powerful domestic and foreign

support. In order to achieve an improvement in the population’s stan-

dard of living on a permanent basis and justify citizens’ great expecta-

tions after the fall of the authoritarian regime, the new government must

immediately start implementing radical economic reforms. This presup-

poses momentary monetary reform, a start to a reform of the fiscal sys-

tem, the reform and consolidation of the banking system and the

implementation of a rapid privatization program, with at the same time a

visible improvement in citizens’ health and social welfare.

In the wake of the formation of a new democratic government inSerbia and FRY, there is expected to be a relatively rapid revival of theeconomy, which will considerably alleviate the problem of the publicdeficit. Expected growth rates in the social product in the course of thisand next year are 14% and 10%. However, the social product in 2001will still not reach the level from 1998. For that reason, the low level ofthe social product will continue to represent the greatest obstacle in theway of balancing public revenues and expenditures.

4. The economy of Yugoslavia comes into the category of econo-

mies highly dependent on foreign trade. According to some assess-

ments, foreign trade accounts for over 40% of the value of Yugoslavia’s

social product. Taking into account unregistered trade (smuggling and

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other aspects of illegal activities), the degree of the foreign trade de-

pendence of the Yugoslav economy is far higher. The EU represents the

basic strategic factor for export-oriented stable economic growth in Yu-

goslavia.

The issue of the genuine liberalization of foreign trade and adjust-ment with the solutions in the EU will inevitably be linked to the speedand the extent of the integration of FRY in the international economy,reception into membership of the WTO and to the development of closerelations with the European Union.

There should, within this, be the immediate abolition of all formsof superfluous administrative barriers in foreign trade transactions(compulsory registration, the compulsory submission of “applications”,etc.). In the process of liberalization, priority would go to the loweringof quantitative barriers, i.e. import permits (this process should not beallowed to last for more than two years, except in extremely rare cases).In the case of customs duties, the total liberalization of trade in the re-gion, as well as of imports from the EU, should not be allowed to lastmore than three years, and, in exceptional circumstances, more than fouryears. Liberalization, however, would not totally encompass agricultureand the food industry.

5. The ultimate objective of adjustment in monetary sphere is

the convergence of institutional solutions and membership of the EU.

However, on account of government policy in the last decade – the

abuse of monetary policy, the maintenance of high price disparities with

the aim of preserving social peace, and large budget deficits – a realistic

strategy implies the introduction of a number of phases in the adjust-

ment process before the economy becomes capable of meeting EU

membership requirements.

In the first period, the fundamental task in the sphere of monetarypolicy will be to obtain a minimal degree of confidence in the dinar.However, due to the need for removing the main disproportions in thedomain of relative prices (power, infrastructure activities, transport,main food products), this will be a difficult task. In this sense, an inde-pendent Central Bank will be a better solution than the direct

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introduction of a classic Currency Board regime, as it enables the grad-ual removal of inherited disproportions while at the same time absorb-ing the inevitable shocks to macro-economic stability and the popula-tion’s standard of living.

In the second phase, if it is necessary, the Currency Board wouldestablish permanent parity to the DM, which traditionally serves as re-serve currency and as means for all capital transactions among the popu-lation. In this way, demand for the domestic currency would increaseconsiderably, more so than in systems without a Currency Board, for theinstitution of a Currency Board represents a guarantee to the domesticand foreign public that a long-term anti-inflation policy is being con-ducted.

6. As a result of the many unfavourable circumstances in the pe-

riod of about two years after political changes, it is hard to expect a

larger influx of private investments. In this period, it is necessary to

make possible the country’s inclusion in international financial and po-

litical organizations and, especially, in all regional economic arrange-

ments. Economic growth in this period will be the result of the abolition

of sanctions, the establishment of links with the world and the influx of

assistance from abroad. But it will also be a result of the activation of the

population’s now hidden resources. Privatization of small-scale and me-

dium-scale companies will be started and, to a considerable extent, com-

pleted.

Even the best privatization nonetheless partially petrifies thegiven economic structure. That is why investments in new companiesand new industries are the key to investment strategy and the basic de-velopment issue. In order to attract investments in new companies, FRYhas to remove or reduce the barriers to trade and investment, as well asthe barriers to entrance on the market.

Investment strategy based on direct foreign investments throughprivatization and, primarily, new companies, can ensure a doubling ofthe GDP in a ten-year period. In order to attract direct foreign invest-ments there must be a reduction of tax and customs rates, tax grace pe-riods, encouragement of investments in propulsive branches and the

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possibility for foreign land ownership. These measures must be accom-panied by an active industrial policy, the aim of which is to attract strate-gic investors. The success of this strategy depends vitally on the initialtwo-year transition period during which credible state and market insti-tutions must be created.

7. In order for our country to be part of the global information

society, a national information infrastructure (NII) and strategic infor-

mation systems must be built up, the structure of the economy changed

and the population educated. The modernization of the telecommunica-

tions network and the establishment of NII cannot be achieved without

major capital investment. Private capital and the participation of inter-

national finance institutions can be secured by promoting the legislative

base and other factors guaranteeing favourable conditions for foreign in-

vestment.

The strategy for the development of informatics in FRY is pro-posed as follows: the linkage of Yugoslavia into the global informationsociety by the development of NII as the precondition for the restructur-ing of the FRY economy and raising competitiveness; continuing theprocess of the abolition of state monopoly and creating conditions forpermanent competitiveness as the driving force for the development ofNII; research and development as the key to innovations, productivityand growth; enabling a simple approach to NII services; the develop-ment and promotion of Yugoslav culture; information literacy and thecreation of the culture of life-long learning; the development of strategicinformation systems, particularly in state bodies, the economy, health,transport, in the sphere of the management of natural resources and en-vironmental protection; creating conditions for the development of ademocratic society and the protection of the rights of individuals, as wellas for the use of information technologies for the reorganization of statebodies and enhancing accountability, effectiveness and transparency inthe work of all public services.

8. Speaking in principle, reforms in the social system would

have to evolve in several directions. The first such direction would cer-

tainly presuppose a change in the role of the state. The state should not

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be the sole organizer, financer and “producer” of social services, but

there are still a large number of functions that the state doubtless has to

continue to perform on a quasi-social market.

The introduction of market mechanisms, the transfer of part of thefunctions to the private sector and non-governmental organizations, andthe introduction of competition in the social sector are some of the pre-conditions for such conceptual changes. The market must be introducedin various parts of the sector: in financing, in some of the service provi-sion segments, in the sphere of allocation instruments on the basis ofwhich resources are distributed to those who provide services, and evenin some parts of the system (such as, for example, maintenance, cleaningand transport). This would, for example, mean the inclusion of privateschools in budget financing (which would also possibly be allowed tocharge extra for their services), the inclusion of private medical practicein the health insurance system, the greater participation of humanitarianand other non-profit organizations in social welfare, etc.

Bearing in mind the gravity of the social problems in Serbia todayand their importance in an assessment of the success of policy, it is clearthat changes in the social sector and in the welfare of the most disadvan-taged groups will be of great importance for any reform-orientated gov-ernment. The formation and functioning of the social sector will dependto a great extent not only on the speed of economic recovery but also onideological orientation and the commitment to a “social” or “conserva-tive-liberal” state. Regardless of that, however, the existing system mustbe reformed.

9. Constitutional changes imply strict adjustment to European

Union standards of constitutional and legal solutions in the domain of

human freedoms and rights, the institution of the rule of law, a demo-

cratically elected parliament and accountable government, independent

judiciary, free media and guarantees for free and fair elections, as well

as the establishment of a market economy system. It is also necessary to

adjust the constitutions of Serbia and Montenegro with that of their fu-

ture state community and start to pass federal laws and other regulations

on the basis of a new federal constitution.

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Besides changes in the basic constitutional-legal and other sys-

temic laws in the sense of their adjustment to the requirements of Ser-

bia’s more rapid integration in fundamental European trends, the new

democratic authorities in FRY-Serbia will be faced with the enormous

task of the gradual harmonization of domestic regulations to EU reg-

ulations, with the ultimate goal of adopting the “legal achievements of

the Community” (acquis communautaire), as a condition for member-

ship in the Union.

The adjustment of FRY regulations with EU rules is an excep-tionally complex process, which should be performed in several stagesand on several levels. It is not a question of the adoption and adjustmentof regulations, which is in itself a huge task. It is necessary at the sametime to prepare the corresponding economic, institutional, administra-tive and legal conditions that will ensure the application and respect ofthe regulations, as well as the provision of the corresponding informa-tion to all those (firstly companies, citizens, administrations, etc.) thatare obliged to respect and carry out the regulations. This process presup-poses that adequate financial and human resources will be secured, aswell as the existence of a sufficiently developed and dynamic economythat is able to meet the costs of respecting a legislation, that in many seg-ments also requires additional and separate investments (e.g. a higherlevel in the sphere of standardization, respect for the rights and protec-tion of consumers, ecological regulations, etc.).

10. Democratic transformation will certainly encompass sev-

eral domains. It will presuppose, amongst other things, the strengthen-

ing of the role of parliament, which, under the present Constitution and

even more in practice, is in the shadow of the republican president. The

second, and no less important domain is the adjustment of normative so-

lutions concerning human and civil rights to European standards, as well

as the establishment of institutions and procedures that will ensure that

these rights are achieved. This is also true of the collective rights of the

members of ethnic groups. The third domain is widening of decentral-

ization, especially concerning the true autonomy of the provinces and

the strengthening of local self-government. Finally, the fourth domain

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concerns relations with Montenegro, in the sphere of which Serbia, par-

ticularly since the deterioration of relations between the two republics in

1998, has grossly violated the principle of the constitutional equality of

the two republics, to the detriment of Montenegro. New relations be-

tween the two republics can only be established in a democratic dia-

logue, with mutual consent. The possibility of the reintegration of the

province of Kosovo, which, according to UN Security Council Resolu-

tion No. 1244, has actually been under UN protectorate since June 1999,

will essentially depend on the results of the democratization of Serbia

and on the achievement of a mutually acceptable arrangement with

Montenegro on the future political community.

11. The third sector in Serbia plays an essential role in the pro-

cess of democratization. It has assumed an important position on the po-

litical scene and it has to maintain and improve that position. Interest in

its development will doubtless rise with the country’s democratization

and openness to the world. It will not be long before we have a generally

favourable social climate, a change in relations between the state and lo-

cal authorities, a stronger economy, and greater opportunities for indi-

viduals to contribute to the development of the non-profit sector with

donations, and professional and voluntary work. In the first phase, how-

ever, international foundations and their support will play a crucial role.

The Stability Pact for South Eastern Europe, the Stabilization and Asso-

ciation Process for the Countries of South Eastern Europe and the ma-

jority of regional initiatives in the Balkans point to increased reliance on

the non-profit sector in the region’s reconstruction and development and

its democratization and stabilization.

12. The prompt advancement of the education system is vital for

successful inclusion in European integration processes. In the new, open

international cooperation, it is vital to start from national priorities while

relying mainly on national expert know-how in order to avoid the de-

structive effect that has been felt in some transition countries of ill-

conceived and exaggerated decentralization (instead of the justified

deconcentration of powers of decision making) and excessive liberali-

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zation and privatization in the domain of education, for which the basic

preconditions do not exist.

The level of education on the environment is particularly low inthis country, and environmental problems are therefore distant, complexand of secondary importance for many citizens. It is necessary to assistall citizens, as well as those responsible for decision-making, to form anew awareness, with the aim of weaving the needs of sustainable devel-opment into all relations and decision-making processes.

13. The imprecision of a large number of norms, their lack of mu-

tual adjustment and even their counter-constitutionality and counter-

legality can be noted in many (although not in all) domains where the is-

sue of civil security is resolved. However, the content of the norms is

not the greatest problem but rather their implementation and the

inculpability with which they can be violated. This places the problem

of control and supervision at the focus of attention. Therefore, it is of

priority importance to review and set into motion existing mechanisms

of external and internal control of the work of state bodies and to set up

new bodies to supervise their work.

A special commission should examine overall police organiza-tion and put forward solutions to raise its effectiveness in the fightagainst crime. Particular attention should thereby be paid to the formsand content of preventive activity, as this aspect is at present totally ne-glected.

14. The resolution of the minority issue represents not only the

precondition for the political stability of a state community, but it is also

an indicator of its level of democracy. Besides, the protection of national

minorities has one of the key places in the political transformation of

Eastern European countries and their coming closer to European inte-

gration processes.

The general, common problems of national minorities would cer-tainly have to be solved with the highest and most general constitutionalacts, ranging from the Constitution and laws to supplementary legalacts, while specific problems, particularly minority problems, should beresolved through suitable governmental policy, that is a policy

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channelled towards respecting the specific interests of the separate mi-nority communities, a policy to generate an atmosphere of tolerance andmutual respect amongst the minority communities.

15. In order for Serbia and FRY to measure up to the modern stan-

dards with respect to the security of individuals (citizens), society and

the state it will, among other things, have to undergo a radical reshaping

of the military-defence sphere. This demands a democratic transfor-

mation of the inherited civil-military relations with a view to establish-

ing democratic civil control over the Yugoslav Army. For this purpose,

a well-conceived and meaningful transformation of the Yugoslav Army

would be indispensable.

The initial preconditions for democratic civil control over the Yu-

goslav Army can be created by changes and additions to the constitu-

tions of FRY and Serbia, as well as to the laws on the Yugoslav Army

and defence. This implies the abolition of or the precise definition of the

Yugoslav Army’s obligation to defend the constitutional order, the abo-

lition of the supreme command functions of the President of Serbia, the

introduction of the obligation that the minister of defence be a civil fig-

ure, the constitutional regulation of the procedure for the civil control of

the army, the reduction of the jurisdiction of military courts and prose-

cuting bodies over civil persons, the constitutional regulation of the con-

trol role of public opinion, etc.

The new authorities will have to define their external and secu-

rity policies, and it is highly unlikely that the joining of the Euro-

Atlantic security system will be a priority objective. There are several

fundamental reasons why it is unlikely that FRY will apply for member-

ship of NATO or the Partnership for Peace, and these reasons are hard to

dispute. There are two major reasons: firstly, the disastrous conse-

quences of the NATO aggression on the FRY and, secondly, the fact that

NATO is outside the UN system of collective security and procedures

for the democratic civil control of the army.

16. One of the paramount priorities to emerge after the fall of

Slobodan Miloševi�’s regime and in the light of the democratic changes

underway in Serbia is the redefinition of overall FRY foreign policy, for

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which qualitatively new foundations must be laid in the shortest possi-

ble period.

In order to achieve this objective, FR Yugoslavia’s foreign policyis faced with a large number of general and concrete tasks, and thesecould be classified in the following manner:

• tasks related to the definition of the general principles and stra-

tegic goals of foreign policy;

• tasks related to relations with international organizations and

with the major states;

• tasks related to relations with neighbouring countries;

• tasks related to the organization of the diplomatic service.

17. The process of the country’s reconstruction, reform and mod-

ernization will not be an easy one, and time will be needed. Similarly,

we cannot expect the country to become a member of the EU in a short

space of time, despite the fact that rapprochement with the EU and grad-

ual integration is one of the foundations on which modernization will be

built. This process is, however, an inevitable one and represents the only

real way to ensure good prospects for this and future generations and

provide an achievable objective.

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